Binding death benefit nominations
Most people consider that if they make a reversionary pension it is legally binding on the trustee. However, in most cases a reversionary nomination is not legally binding as the trustee generally retains a discretion to revert or commute the pension (and say pay out a lump sum). Put simply, a reversionary nomination is generally a mere wish.
A valid binding death benefit nomination (BDBN) will therefore generally override a member’s reversionary wish in their pension documents. Naturally, the precise position needs to be analysed after viewing the particular SMSF deed and BDBN.
One advantage of having a BDBN in place is that it may be used to direct the trustee to pay a particular pension to the member’s chosen dependant. Therefore, the pension documentation will be overridden by the BDBN. This creates a situation where it may be possible for a pension to be reversionary (due to the BDBN) even if there is no reversionary nomination in the pension documentation. This highlights the need for consistency between the BDBN and pension documents. Ideally, every document should be carefully considered and consistent. Otherwise, costly legal challenges may arise.
The ‘magic boomerang’
In today’s world, it is common for a person to have a partner from a second or subsequent relationship, and also the possibility of both to have children from their first relationships. Say for example, the father dies leaving children from his first relationship, and his second spouse has her own children from her own first relationship. In this scenario, he may wish for his pension to go to his second spouse for the rest of her lifetime, and then any capital left on her death to go to his children from his first relationship.
The difficulty with achieving this goal is that, without appropriate legal documents, it relies primarily on the trust and honesty of the second spouse to abide by the deceased spouse’s instructions or wishes.
As most people are aware a will and a BDBN are freely revocable (eg, the second spouse can revoke her will and BDBN). However, a mutual wills agreement can bind a couple to their mutual promises and undertakings (subject to the practical issues of enforcement).
Moreover, the SMSF deed can be varied to limit a death benefit to be paid as a non-commutable minimum pension to the second spouse (and certain other important limitations to achieve the member’s goals may be included).
While these documents provide greater certainty, there is no way to be 100 per cent guaranteed. Therefore, it is worthwhile considering other options.
The ‘kiss it goodbye strategy’
This is a method of splitting up one’s superannuation interests into multiple superannuation funds. For example, the father could have two superannuation funds and upon his death he could leave one interest to his second spouse, and the other interest to his children from the first relationship. This provides a more certain distribution of his superannuation interests.
If the father had two SMSFs, he should have two different corporate trustees and ensure his will includes, amongst other things, specific gifts of the shares to his spouse and children.
Summing up
Pensions provide great flexibility and planning opportunities. However, careful planning and the correct documentation are critical requirements.
Disclaimer
This is article is general information only and does not constitute financial advice and should not be relied upon without first seeking advice from an appropriately qualified professional.
