However, there are situations where the alternative – allowing the trustee discretion to decide on whom and how the death benefit should be paid – may be more desirable.

Whether or not a binding nomination is appropriate generally depends on the member’s family circumstances.

The case for binding nominations

There are two broad scenarios where the certainty provided by binding nominations will often make them the appropriate choice for an SMSF member.

The first is where one of the parents has already passed away and, on the death of the second parent, the benefit is to be paid to two or more adult children. In a study of estate battles in the courts of the eastern states – Bleak House Revisited? Disproportionality in Family Provision Estate Litigation in New South Wales and Victoria – Professor Prue Vines from the University of NSW found that siblings fighting against each other was the most common reason.

The other is step and blended families, where the children of the first marriage may be expected to fight the decision to pay super death benefits to a step-parent (or vice versa).

The case for trustee discretion (or non-binding nominations)

While the greater certainty provided by a binding nomination can be important for some people, flexibility can be desirable for clients whose circumstances are not complex and are unlikely to be challenged.

For example, couples with young children and no other dependants would generally have no person within or outside the family unit who could validly challenge the trustee’s discretion or contest a deceased parent’s estate.

Equally, where there is a surviving spouse and adult children with no prospect of family discord, any form of challenge may be most unlikely.

In such cases, a binding nomination limits the ability of the surviving spouse to work with professionals, such as their financial adviser and lawyer, to determine the optimal amount of a death benefit (often bolstered by insurance) that is paid:

• To the estate, primarily in order for proceeds to flow into a testamentary trust that provides significant tax and asset protection advantages (see below), and;
• To beneficiaries directly, including the quantum of death benefits apportioned between beneficiaries.

By contrast, trustee discretion allows flexibility for the surviving spouse to work with professionals to craft an ideal outcome based on their circumstances at the time of death, including:

• The ages of their children and whether or not they are tax dependants of the deceased at that time;
• Outstanding debts they wish to repay;
• The family’s income needs, given the loss of the deceased spouse’s income and/or increased need for child care, and;
• Any risks, such as protection from creditors that the family may require.

Child beneficiaries

For children under 18, the surviving spouse can enhance tax planning by allocating:

• A greater amount of the death benefit in the form of pensions taxed at adult rates with a 15 per cent tax offset to younger children; and
• Smaller pensions or no pensions, to children who have already or will soon turn 18 to ensure that they don’t have early access to a significant amount of capital.

Flexibility for minor children is also an option where money is directed to the deceased’s estate and placed in a testamentary trust. Income distributions paid to young children from testamentary trusts are taxed at adult rates (although they do not qualify for the 15 per cent tax offset that child super pensions enjoy).

Adult beneficiaries

If the objective is to make some capital available to adult children who are not tax dependants, it can be tax-effective for death benefits to be paid tax-free to the surviving spouse who subsequently gifts money tax-free to the children.

As with younger children, it can also be beneficial to direct money via the estate to testamentary trusts for adult children. The benefits include ensuring assets held in trust remain in the bloodline of the deceased spouse in the event of the surviving spouse remarrying and that subsequent marriage fails. According to the Australian Bureau of Statistics, the rate of failure of second marriages is about 60 per cent.

Additional benefits may be protection of trust assets in the event that adult children have subsequent relationship breakdowns, or are ‘at risk’ because they run a business or due to their profession.

Flexibility or certainty

In advising clients in relation to the type of beneficiary nomination that is suitable for their SMSF, it’s important to find out what is most important to them and consider the family’s circumstances.

If the trustee discretion path is taken, careful planning is required to ensure the governing rules have clear trustee succession rules (including allowing the executor to step in for a deceased member) and just as importantly, clear voting rights. Also, the member needs to be comfortable that the persons acting as trustees will act in the best interests of the potential dependants.

Jon De Fries, national manager of succession advice, MLC