Expert SMSF insights
What’s involved in paying a death benefit
By Graeme Colley
Death benefits can be a tricky area – with recent court cases scrutinising the validity of death benefit nominations and trust deed amendments. However, with sufficient know-how you should be able to avoid any pitfalls.
First check the trust deed
When considering payment of a death benefit, just like all benefits, the fund’s trust deed is the first port of call.
Sometimes the fund’s deed can be written in very broad language — with the payment of death benefits subject to superannuation legislation and providing the trustees with some flexibility. At the other end of the spectrum, the deed may be very detailed and prescriptive.
Accommodating the deceased’s wishes
The trust deed may require you to find any instructions given by the member as to how their benefit should be dispersed.
Such instructions can include a binding death benefit nomination – which, as its name suggests, binds the trustee to the deceased member’s wishes.
A member may also provide a non-binding nomination to indicate their wishes, with the final decision being left with the remaining trustees. This can have advantages if there is some estate smoothing or tax benefits by paying the superannuation to one dependant over another.
To be valid, a death benefit nomination must be witnessed by two people who are older than 18, who are not beneficiaries under the nomination nor the person making the nomination. It is possible for the nomination to lapse after a period, commonly after three years, or to be non-lapsing. Usually, the nomination can be amended, replaced or rescinded at any time.
Another form of instruction, which may be better thought of as an ‘arrangement’, is a reversionary pension. If the member is receiving a pension at the time of their death, a reversionary beneficiary may be nominated to receive the continuing pension.
The different types of nominations
So how does the payment of a death benefit differ with different types of nominations? Let’s look at the following examples.
Binding beneficiary nomination to surviving member spouse
Provided the nomination is valid the trustee must follow it. The only real complexity is where the deceased was in receipt of a pension at the time of death which included a reversion to a surviving spouse. Generally, the reversionary pension would take priority to any binding death benefit nomination that may also be in place at that time. The trust deed should provide guidance.
Binding beneficiary nomination to estate
Provided the nomination is valid the trustee must pay the amount as a lump sum to the estate of the deceased. The executor of the estate will distribute the amounts in accordance with the will of the deceased.
Non-binding beneficiary nomination to surviving member spouse
As the nomination is not binding, it is for the trustee to determine the recipient – a dependant of the deceased member and/or their legal personal representative, and the respective portions where relevant. The decision can also be subject to superannuation legislation and trust deed provisions, which may offer discretion as to the form of the benefit – lump sum, pension or a combination.
Reversionary pension to surviving member spouse
If the deceased member was in receipt of a pension that included a reversion to their surviving spouse, then this must be honoured. The only exception is where the trust deed prioritises a binding death benefit nomination over a reversionary pension.
If at the time of the member’s death the nominated reversionary is no longer alive, a subsequent reversioner may be nominated, or the trustee may need to refer to any valid binding death benefit nomination or the fund’s trust deed.
When it comes to paying death benefits, keep it simple and start at the top. Check what the fund’s trust deed says and follow the order for payment. Depending on the provisions of the deed, you may have to prioritise a reversionary pension before considering a death benefit nomination. Finally, where these nominations have not been made, it’s generally up to the trustee to distribute benefits as they see reasonable.
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