26/02/2016

Binding death benefit nominations and reversionary pensions are two means available to members of an SMSF to select who is to receive their death benefit. But what happens if they are both used but clash?

Kate and William are the members of the Royal Family Superannuation Fund.

At the time of setting up their SMSF, both Kate and William signed a binding death benefit nomination, (which under the terms of the trust deed are non-lapsing) nominating their respective legal personal representative (ie their estate) as the sole recipient of their death benefit.

A few years later, William commences an account-based pension and nominates Kate as the reversionary beneficiary of the pension.  The pension interest is his only superannuation interest.

Fate has it that William gets hit by a red double-decker bus the following year and passes away.

Who gets his death benefit?

There has been some confusion recently about which direction to the trustee “wins” to the extent that they are inconsistent: a binding death benefit nomination or a reversionary pension?

In this scenario (assuming both the binding death benefit nomination and the reversionary pension are valid) the trustee is confronted with the following choice:

-    the binding death benefit nomination signed by William names his estate as the recipient of his death benefit (via the legal personal representative)

BUT

-    the reversionary beneficiary nominates Kate as the recipient of his pension interest.

Who gets their hands on William’s death benefit depends entirely on what the trust deed says. Most deeds say that a binding death benefit nomination takes precedence over a reversionary pension although some choose to go the other way.  

Under SUPERCentral’s governing rules a reversionary pension (if properly set up) will prevail over an equally valid binding death benefit nomination to the extent that they are inconsistent.

If the trust deed is silent, the matter is likely to have to be resolved in court (which is a costly and time-consuming exercise) after all nominated beneficiaries have argued over which direction should be followed by the trustee.

As such a situation could create a lot of heartache and costs for the trustee and the potential beneficiaries in the future.  Now is as good a time as any to conduct a check of a fund’s affairs to:

-    check whether any member has both a non-lapsing binding death benefit nomination and a pension which is reversionary;
-    if so, check whether they are consistent;
-    if they are inconsistent, check the trust deed to find out which prevails;
-    update your trust deed if necessary (this is particularly recommended if the trust deed is silent on this issue); and/or
-    amend the binding death benefit nomination (if possible) or the terms of the pension to achieve the intended result.

It’s also important to remember that while a pension may have started as a non-reversionary pension, its terms may have been later amended by the member to nominate a reversionary beneficiary (and vice versa).  So it is crucial to review the terms of the pension when it started but also any subsequent changes made to them.

It is worth noting that even in situations where the pension is reversionary, a binding death benefit nomination will apply where:
-    the nominated reversionary beneficiary passed away before the member;
-    the member has other superannuation interests which are not affected by the reversionary nomination (e.g. accumulation interest or non-reversionary pensions); or
-    the nominated reversionary is no longer eligible to receive the pension benefit.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.