Binding death benefit nominations: getting them right
A binding death benefit nomination (BDBN) is a written direction from a member to the trustee specifying how the member’s superannuation benefits are to be dealt with on their death. Where the nomination is valid, the trustee must follow it. A non-binding nomination, by contrast, is something the trustee may consider but is not obliged to follow.
For SMSFs, the single most important point is also the most commonly misstated. The familiar rules, that a nomination must be witnessed by two adults who are not nominated beneficiaries, and that it lapses after three years unless renewed, come from section 59(1A) of the SIS Act and regulation 6.17A of the SIS Regulations. The High Court confirmed in Hill v Zuda Pty Ltd [2022] HCA 21 that regulation 6.17A does not apply to SMSF nominations, consistent with the Commissioner’s earlier view in SMSF Determination SMSFD 2008/3. An SMSF nomination is therefore not automatically subject to the two-witness requirement or the three-year lapse rule by force of the regulations.
What governs an SMSF nomination is the fund’s deed and governing rules. Many deeds deliberately adopt requirements that mirror regulation 6.17A, including witnessing and a lapse period, and where a deed does so those requirements bind because the deed says so, not because the regulation applies. Other deeds permit non-lapsing nominations, impose their own formalities, or say very little. The only way to know what a particular fund requires is to read its current deed. Courts have consistently enforced deed requirements strictly, so a nomination that satisfies the regulation but not the deed can still fail.
The consequences of an invalid nomination are significant. If the nomination does not comply with whatever the deed requires, the trustee falls back on their discretion in paying the death benefit. That can produce an outcome quite different from what the member intended, with the benefit going to a different person or in different proportions, and it is a common source of litigation between surviving family members. A nomination must also be in favour of a permitted recipient: a dependant of the member, or the member’s legal personal representative.
Older deeds are the usual problem. A deed that has not been reviewed for many years may contain no non-lapsing nomination power, may impose formalities the member has not followed, or may not deal clearly with the interaction between a nomination and a reversionary pension. CoSec Partners can prepare a deed variation to update the nomination provisions, and prepare nomination documents drafted to the requirements of the fund’s own deed, with each document drafted and signed off by Key Legal, an independent external law firm. Whether a particular nomination strategy is appropriate for a member’s circumstances is estate planning and superannuation advice, which sits with the member’s adviser or their lawyer rather than with us.
Frequently asked questions
Do SMSF binding nominations lapse after three years?
Only if the fund’s deed says so. The three-year lapse rule sits in regulation 6.17A, which the High Court confirmed in Hill v Zuda Pty Ltd [2022] HCA 21 does not apply to SMSFs. Many deeds adopt a lapse period anyway, so the only way to know is to read the current deed.
Does an SMSF nomination need two witnesses?
Again, only if the deed requires it. The two-witness requirement comes from the same regulation that does not apply to SMSFs. Where the deed adopts it, it binds, and courts enforce deed formalities strictly, so the safest approach is to satisfy whatever the deed specifies precisely.
What happens if a binding death benefit nomination is invalid?
The trustee falls back on their discretion in paying the death benefit. That can produce an outcome quite different from what the member intended, with benefits going to a different person or in different proportions, and it is a common source of litigation between surviving family members.
Who can a member nominate?
A dependant of the member, or the member’s legal personal representative. Dependants include a spouse, a child, a person in an interdependency relationship, and a financially dependent person. A nomination in favour of someone outside those categories is not effective, whatever the deed says.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.