So it’s tempting to think that the trust deed is not really that important – the logic being that “if we don’t like what we have, we can just change it really easily”.

While part of that sentence is true – it’s generally easy to change – that doesn’t mean it’s not a critical document. And while SMSF trust deeds might be fairly generic, there are still differences that mean some important questions might be answered quite differently by someone with Deed A vs Deed B.

This became clear to me recently when I received a question about a binding death benefit nomination for a member who had recently died – let’s call them Xanthe.

In this case, the binding death benefit nomination left Xanthe’s super to be divided equally between three different people (Annie, Bertie and Clarice). Let’s assume all were valid recipients when the nomination was made – they were “death benefit dependants” for super law purposes. Super death benefits can only be paid to “dependants” (which, for most people, is their spouse and children of any age) or the deceased’s estate. The only time the money can be paid to another individual is if there are no dependants and no estate is formed. So in this case, let’s assume that the three beneficiaries were Xanthe’s children – all dependants for super purposes.

The challenge in this case was that Annie died several years ago – in fact, before Xanthe. What happens? Does it all go to Bertie and Clarice? Or does Annie’s share now go to Annie’s estate? Or is the whole death benefit nomination invalid? Or… is there another option entirely?

One part of the question is reasonably straight forward. In Xanthe’s case, she had some death benefit dependants. So the super can only be paid to Xanthe’s remaining dependants or estate. While Annie was a valid recipient of Xanthe’s super while she was alive, that doesn’t extend to Annie’s estate.

So in this case, one thing’s for sure : nothing is going to Annie’s estate. And it probably won’t be able to go to Annie’s spouse or children either because in most cases they won’t be classified as Xanthe’s “dependants” (for example, grandchildren aren’t valid recipients unless they were also – say – financially dependent on Xanthe and therefore another of her dependants).

What happens then? The answer really does depend on the trust deed. And in this case, Xanthe has already died – it’s probably too late to change the trust deed. That would definitely invite a challenge by anyone disappointed in the result.

Some trust deeds say that whenever any part of a binding death benefit nomination can’t be fulfilled, the whole nomination is disregarded. If that was the case in Xanthe’s fund, the rules would essentially revert back to normal super rules when members don’t make binding death benefit nominations at all. The trustee decides who gets the money. Of course, they would still be subject to the usual rules about only paying the money to permitted beneficiaries. That would include Xanthe’s estate (still not Annie’s) and dependants such as Bertie, Clarice and any other children or Xanthe’s spouse. This could get particularly tricky if Xanthe’s new spouse was the trustee of the SMSF and decided to pay all of the super to themselves!

Other trust deeds take the exact opposite view – they provide specific instructions for what happens when just one part of a nomination is invalid. For example, the deed might provide that the trustee must treat the remainder of the nomination as valid – in this case, paying Bertie and Clarice 1/3rd each.

What happens to the final 1/3rd will also be determined by the trust deed. The deed might hand that decision to the trustee or it might specify that it is divided proportionally between the “valid” beneficiaries (meaning in this case that Bertie and Clarice would end up with 50% each overall).

Alternatively, some binding death benefit nominations address this directly. Xanthe’s nomination might specify that if any of her beneficiaries pre-decease her, their “share” is to be paid to her (Xanthe’s) estate. Of course, Xanthe would also have needed to think about this when preparing a Will. For example, if the money was to go to Annie’s children, Xanthe would need to ensure that the Will included specific instructions for any super death benefits that were paid to the estate because a beneficiary had pre-deceased her.

As you can see, it’s complicated.

And even this assumes the trust deed and the binding death benefit nominations make the situation clear. Many older SMSF deeds don’t address this at all – meaning it’s anyone’s guess. Lawyers, courts and all manner of other expensive people may need to get involved.

This is just one example where the trust deed is critical but there are others.

For example, what happens for those who have reversionary pensions (pensions deliberately set up to continue to a spouse) but also a binding death benefit nomination that leaves everything to their estate? The two sets of instructions contradict each other. Which one “wins”? It will depend on the deed.

And what about those who set up pensions and then want to change something about that income stream (for example, add, change or remove a reversionary beneficiary)? Can they do it without stopping the pension and starting a new one? Again, it depends on the deed.

All up, even though SMSF trust deeds are often generic these days and almost always easy to change, they’re still vital. They’re definitely not all the same so it’s important for SMSF trustees to know what they’ve got.