For present purposes, we use the term BDBN to refer to a written nomination from a fund member directing the fund trustee to pay the member’s superannuation death benefits in a specific way.

Why are BDBNs important?

BDBNs are a vital tool in SMSF succession planning for several reasons:

Providing greater certainty

When a superannuation fund member dies, various questions need to be answered by the trustee of the fund including the following:

· Who is to receive the deceased member’s benefit?

· How is the benefit to be paid?

· When is the benefit to be paid?

A valid BDBN can simplify trustee decision-making in relation to these points by removing the discretionary elements that typically arise, ensuring that the deceased member's nominated wishes are respected.

Consider a scenario where a person has made a will. The will stipulates that, when the person dies, all of the will-maker’s assets are to be distributed to their spouse. However, a will does not generally dictate what happens to a person’s interest in a superannuation fund as superannuation is held as part of a separate trust estate and governed by the particular rules of that trust. Accordingly, in this scenario, the will-maker may be surprised to learn that the terms of their will does not cover what happens to their superannuation as this is determined based on their fund’s governing rules.

Therefore, a BDBN can provide greater certainty by displacing a trustee’s discretionary powers in relation to the payment of superannuation death benefits, ie, because a trustee must generally adhere to directions specified in valid BDBN.

Avoiding claim staking issues

BDBNs can help avoid complications related to the claims staking process, which requires trustees to follow a proper procedure when exercising discretion.

By removing the trustee’s discretion, BDBNs can overcome a number of issues associated with the requirement that trustees must follow a proper process when exercising a discretion.

If a fund trustee is obligated to adhere to a valid BDBN, the trustee won’t need to justify its actions in distributing death benefits based on discretionary decisions. In contrast, if no BDBN exists and a proper claims staking process hasn't been followed, the trustee could face lengthy and costly disputes, potentially leading to court challenges.

It is advisable to have a lawyer review the SMSF deed history, BDBN, and related documents to ensure the BDBN is legally effective before relying on it.

Addressing conflicts

BDBNs can also mitigate potential conflicts for dependent beneficiaries who also serve as legal personal representatives.

For instance, a spouse of a deceased member who acts as the executor (or administrator) of the deceased’s estate may find themselves in a conflicted position where the deceased did not have a BDBN in place and the spouse seeks to have the death benefits paid to them personally. This is due to the strict fiduciary duties that apply to executors/administrators.

Thus, a surviving spouse who may be in a position to determine how death benefits are paid (ie, (as the remaining SMSF trustee/director) should have regard to any applicable fiduciary duties they have as an executor/administrator before taking any action where there is no BDBN.

If such a surviving spouse elects to receive death benefits personally and there is no conflict authorisation in place (eg, in the deceased’s member’s will), it is likely this will be a conflicted transaction and the payment would be at risk of legal challenge. Alternatively, the spouse may be forced to decline the role of executor to avoid a potential dispute, which may be contrary to the deceased’s intentions.

How to make a BDBN

The exact process to make a BDBN depends on the requirements of the fund’s specific governing rules. However, best practice typically requires:

· Ensuring that the fund’s document trail is fully complete and in order.

· Executing the BDBN via traditional wet signatures (While electronic signatures may be becoming more popular, we strongly recommend sticking to traditional wet signatures for the time being.)

· Having two independent adult witnesses to the signing.

· Ensuring that the BDBN fully complies with all requirements in the SMSF’s governing rules. (For example, governing of other firms may require that the BDBN be given to the trustee in order to be valid, various information disclosures be provided to particular parties and/or that the BDBN be drafted/exist in a particular form.)

How long can a BDBN last?

In Hill v Zuda Pty Ltd [2022] HCA 21, the High Court unequivocally confirmed that an SMSF BDBN can last indefinitely under the SISA/SISR.

However, the following important qualification applies: whether or not a BDBN for a particular fund is actually capable of being indefinite and non-lapsing depends on the terms of SMSF’s governing rules. For instance, if the governing rules in the SMSF deed specify a three-year limit, then that’s the applicable limit notwithstanding what is permitted under the legislation.

Further, where a fund’s governing rules are unclear or ambiguous regarding the standards that governing BDBNS, there is a risk that, if reviewed by a judge in court, the judge might find that this particular fund’s BDBN can only last for three years (see, eg, Donovan v Donovan [2009] QSC 26 where a 3-year sunset rule was broadly imported due to the governing rules of the fund referring to ‘Statutory Requirements’).

Thus, a well-drafted SMSF deed should expressly provide that BDBNs last indefinitely. Naturally, DBA Lawyers’ SMSF governing rules expressly provide that a BDBN can last indefinitely.

Who can be paid pursuant to a BDBN?

The class of persons who can receive superannuation death benefits pursuant to a BDBN is limited by superannuation law, however, it is subject to the fund’s governing rules, as BDBNs are a creature of the deed.

If a deceased member has made a valid nomination, the trustee must provide the deceased member’s benefit to the person or persons so nominated due to the binding nature of the nomination. To do otherwise would be in breach of the trustee’s duties.

Most SMSF governing rules allow superannuation death benefits to be paid to the widest possible range of recipients allowable under the SISA and the SISR. DBA Lawyers’ SMSF governing rules allow this. This widest class of possible recipients is broadly:

· all spouses of the deceased;

· all children (regardless of age) of the deceased;

· everyone in an ‘interdependency relationship’ with the deceased;

· everyone financially dependent upon the deceased; and

· the legal personal representative (LPR) of the deceased.

It is important to observe who is not in this class of potential recipients. For example, typically, grandchildren, siblings or charities cannot directly receive superannuation death benefits. Instead, if a superannuation fund member wishes their superannuation death benefits to be paid to such recipients, the member might wish to:

· make a BDBN in favour of their LPR (their estate); and

· ensure that they (ie, the fund member) have made a will specifying that any superannuation death benefits that the LPR receives are then paid to their nominated beneficiary, eg, their grandchildren, etc.

To illustrate the above, consider the case of Re Narumon Pty Ltd [2018] QSC 185 (Re Narumon). Here, a superannuation fund member made a BDBN directing, among other things, 5% of his superannuation death benefits to be paid to his sister (Mrs Keenan). Mrs Keenan was not financially dependent upon the member, nor were the member and Mrs Keenan in an interdependency relationship. Therefore, unsurprisingly, the court noted:

Since Mrs Keenan is not a dependant, the nomination of 5% of such benefits to be paid to her will not be binding on the trustee, and it will be a matter for the trustee to deal with that 5% in accordance with clause 31.1 of the 2014 deed [governing rules].

Conclusions

In summary, BDBNs can play an important role in a robust and effective SMSF succession plan, including by providing greater certainty, overcoming fiduciary conflict issues and helping facilitate smoother administration of superannuation benefits.