A common misconception is that a superannuation fund’s death benefits automatically form part of a member’s estate.  This is not the case and in fact the default position is that the trustee of the deceased member’s superannuation fund has the discretion to distribute their superannuation death benefits to certain persons within a permitted range of beneficiaries outlined under superannuation law (e.g. the deceased member’s spouse).  The person nominated by the trustee to receive the superannuation death benefit may not be a person who the deceased member intended to receive their death benefit.

A superannuation fund member can override the trustee’s discretion to distribute their superannuation death benefit by making a binding death benefit nomination (BDBN).  Where a member makes a BDBN the trustee is compelled to pay their superannuation death benefits to the person nominated by the member in the BDBN, provided that nominated person comes within the permitted range of beneficiaries outlined under superannuation law.  Making a BDBN therefore provides greater certainty to superannuation fund members of where their superannuation is to be distributed once they pass away.

Under superannuation legislation, BDBNs made in relation to retail superannuation funds automatically expire after 3 years if they are not confirmed.  However, members of self managed superannuation funds (SMSF) can make non-lapsing BDBNs which last indefinitely, provided that the provisions of the superannuation fund deed allow for it.

The ability to make a non-lapsing BDBN is useful given the propensity of members to forget to confirm their BDBNs every 3 years.

A case which illustrates the importance of having an appropriate BDBN in place Katz v Grossman [2005] NSWSC 934. 

Although the case underlines how important it is for estate planning purposes to ensure that the trusteeship of a SMSF is passed on to an appropriate person once a member, the issues that arose in the case would not have arisen had there been a valid non-lapsing BDBN in place, because if there was one, the trustees of the SMSF would have been compelled to comply with the deceased member’s wishes.

The case involved Mr Katz bringing an action against his sister, Mrs Grossman (and her husband), claiming an interest in their father's superannuation death benefits. 

Broadly the facts of the case were as follows:

1. originally, the father and mother were the individual trustees of the SMSF;
2. the mother died some years before the father, and subsequently Grossman was appointed as a co-trustee with her father to ensure that the SMSF continued to comply with the relevant superannuation law related to the make up of an SMSF;
3. when the father later died, Grossman appointed her husband as a co-trustee with her;
4. during his lifetime the father had made a non-binding nomination indicating that he wanted his superannuation entitlements divided equally between his children, Katz and Grossman; and
5. Grossman and her husband ignored the nomination and paid the entire of the superannuation entitlements for the benefit to her only.

The Court held that all the trustees of the SMSF had been validly appointed at the relevant times, and that as a result, the challenge by Katz was unsuccessful and Grossman was entitled to keep all the superannuation entitlements.

If the father in Katz v Grossman had made a non-lapsing BDBN, then Mr Katz would have been successful in his challenge and his father’s intentions would have been fulfilled.