Death benefit nominations
It is important to consider the role of both binding death benefit nominations and discretionary (non-binding) nominations in the estate plans of SMSF members. Generally binding nominations can provide greater certainty over the destination and proportion of death payments (and reduce the risk of legal challenge upon death) but tend to be more rigid compared to discretionary nominations.
SMSF trustees can choose whether or not to accept binding death nominations or discretionary nominations in favour of SIS dependants or the deceased’s estate, subject to the governing rules of the fund.
Binding v Discretionary
Binding death benefit nominations are of most benefit if the potential exists for a member’s deceased estate to be subject to legal challenge (e.g., family provision claims, bankruptcy situations). They may also be appropriate in blended family situations (e.g., situations involving children from previous relationships, members in second marriages etc) or simply where a dependant cannot be trusted with lump sum benefits and the member wants to ensure that only an income stream can ever be received.
The discretionary nominations provide the trustee with discretion to pay out the death benefits to dependent beneficiaries after taking into account any changing circumstances. This could overcome potentially inequitable situations, without the on-going administrative obligations of binding nominations.
In some cases it may be useful for the remaining trustee (often a binding nominee) to have discretion in relation to the form of death benefits payable (e.g., pension or lump sum, cash or in-specie).
SISR 6.17A puts in place administrative controls that govern the acceptance of binding death benefit nominations from members, including:
- the automatic invalidation of nominations after a period of three years (or any shorter period as stipulated in a fund’s governing rules) from the date the nomination was made, or was last confirmed or amended, by the member
- the power of the trustees to choose whether or not to accept binding death nominations subject to the governing rules of the fund; and
- if the trustees decide to accept binding death benefit nominations, the requirement for trustees to give information to the members to explain the effect of making a binding nomination (SISR 6.17A(3)). The information must be given before the trustees accept a binding death benefit nomination.
It is prudent for SMSF trustees to notify members annually of their existing nominations and at the same time enable members to confirm or update their nominations as necessary.
CA Financial Services will help determine the appropriate nomination for you with respect to your wishes, and the potential tax consequences your estate may be liable for. Contact CA
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