SUPERANNUATION AND WILLS

The Trustees have a discretion as to who, among the dependants of the deceased member are to benefit. The Superannuation Industry (Supervision) Act (“the SIS Act”) provides in Section 59 that the rules of a fund must not permit the exercise of any discretion other than by Trustees BUT Trustees may permit a member to give a notice requiring any benefit payable on or after a members death to a person or persons being the Legal Personal Representative or a dependant or dependants of the member. Subject to compliance with the regulations under the SIS Act such a notice is binding on the Trustees. Such a notice is called a “Binding Death Benefit Nomination”.

The requirements of the regulations made under the SIS Act are that:

- The rules of the Fund must allow a member to make a binding death benefit nomination.

- The persons mentioned in the nomination must be the Legal Personal Representative of a member or a dependant of the deceased member.

- The nomination must be in writing.

- The nomination must be signed and dated by the member in the presence of two witnesses each of whom is at least 18 years of age and neither of whom is a person named in the nomination.

- The nomination must contain a declaration signed and dated by the witnesses saying that it was signed by the member in their presence.

A nomination may be revoked, confirmed or amended. A nomination ceases to have any effect on whichever is the earlier of three years after it was first signed or last confirmed or amended by the member and any shorter period fixed by the governing rules of the fund.

Who is a Dependant. Who is a Legal Personal Respresentative. For the purposes of a binding death benefit nomination dependant is defined as including a spouse or any child of a member. A dependant also includes a person whose relationship with a member:

- is a close personal relationship; and
- who lives with a member; and
- one or each of them provides financial support to the other; and
- one or each of them provides domestic support and personal care to the other. (This relationship is called “an interdependency relationship”).

A dependant may also include anyone who is in fact dependant.

A Legal Personal Representative is the Executor of the Will of a deceased person.

What happens to a deceased person’s super benefit on death if there is no binding death benefit nomination? The Trustee will have a discretion as to whether a benefit should be paid to a dependant or into the deceased members estate i.e. to the member’s Legal Personal Representative.

There will be many instances where the member of the super fund will feel that his/her family controls the Trustee so that no formal direction as to the application of the funds after the death of the member is required. In such cases the application of the funds will remain at the Trustees discretion. In the case of self managed superannuation funds if the Trustees are individuals all members must be Trustees and if the Trustee is a company each Director of the company must be a member of the fund (Section 17A SIS Act). Where a self managed super fund has 2 or more members the surviving Trustee or Director will be able to direct the payment of or deceased members benefit.

What happens if there is a binding death benefit nomination in favour of the member’s legal personal representative.

In this case the funds must be paid to the deceased member’s Executor (Legal Personal Representative) to be held on the terms of the deceased member’s Will. If the deceased member has made a Will which spells out exactly what is to happen to the superannuation proceeds then that is how the funds will be applied. What is more likely is that the Will of the deceased member will not single out the superannuation funds for special treatment – the funds are more likely going to be treated in the same manner as the deceased member’s other estate.

A binding death benefit nomination in favour of the legal personal representative will increase the value of the deceased member’s estate. One consequence is that if there is a challenge to the Will then the assets available to satisfy that challenge will be much greater than if the death benefits bypass the legal personal representative. It is possible to bypass the legal personal representative and go direct to the beneficiaries but only if those beneficiaries are dependants – only persons who are dependants can benefit by a binding death benefit nomination. Take a common scenario – the aim is to benefit the spouse or if she is dead then the children and if any of them die, their children. This cannot be achieved by a nomination because grandchildren are not dependants. But the right result could be obtained by a nomination to the spouse, or if she is dead, to the (named) children with a proviso that if a named child dies leaving children then that share is to go to the legal personal representative. The Will could then direct that share to the grandchildren.

So, there’s a binding death benefit nomination and the member dies. What happens?

Death is a “compulsory cashing event” for superannuation funds so the death benefit is required to be cashed as soon as practicable after death. Note that “cashing” does not mean literally converting to cash – it means distributing the assets.

In general a Trustee can only pay a death benefit either to a dependant of the deceased member or to the Executor of his estate. Assume the binding death benefit nomination nominates the Legal Personal Representative (i.e. the Executor) as the person to whom the death benefit is to be paid. In such a case the distribution of the death benefit will be as provided for in the Will of the deceased member.

Prior to the 2006/2007 budget the interest of a deceased member passing to a spouse or other dependant would normally be tax free up to the deceased member’s pension RBL. It would not have mattered whether the benefit passed via a binding death benefit nomination in favour of the spouse or via a binding death benefit nomination in favour of the Legal Personal Representative and then to the spouse via the Will or direct from the Trustee in the exercise of its discretion. The definition of “dependant” was (and may still be) crucial because for the purpose of obtaining tax exemption the definition is more restrictive than in other cases. “Dependant” means a spouse or former spouse (including de-facto spouses but not same sex partners) a child of the member aged less than 18 years and any other person who was in an inter-dependency relationship.

If a person has dependants and intends them to benefit from the superfund a binding death benefit nomination should say so or it should direct the benefit to the Legal Personal Representative and the Will should say so. If the death benefit is not taxable nothing will have been lost and if it is taxable much will have been gained.

The 2006/2007 Federal Budget proposes substantial reforms of the superannuation system. At present the proposals are proposals only and may well be implemented in a form different from that which has been proposed.

What if a member of a super fund has no dependants (as defined in the SIS Act.

In this case it is not possible to have a binding death benefit nomination other than to the Legal Personal Representative. In this case the member should make a binding death benefit nomination in favour of his Legal Personal Representative and ensure that his Will directs the distribution of his super benefits as part of his estate either specifically or generally with the rest of his estate.

What happens where a testator (Will maker) wants to direct how his/her estate is to be administered over a prolonged period after his death.

The reasons for doing so may include:

- Fears of bankruptcy or claims by beneficiaries partners.
- Disability or perceived spendthrift behaviour.
- To access taxation benefits.
- To preserve property without changes of ownership (and thus defer/minimize capital gains tax).

These matters will be considered in a subsequent issue.