Binding death benefit nominations and SMSFs post the ATOs

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					Binding death benefit nominations and SMSFs
post the ATO’s finalisation of SMSFD 2008/D1                                                                    February 2008

The case of Katz v Grossman [2005] NSWSC 934                       of a nomination permitted by section 59(1), the will
(16 September 2005) highlights the need for                        just happens to be a means of both making a
members of a self managed superannuation fund                      nomination and ensuring who gets the death benefits.
(SMSF) to either have left a binding nomination as
                                                                   If there is no nomination that is binding on the trustee,
to how they want their superannuation benefits to
                                                                   the superannuation law permits a trustee of a SMSF to
be paid on their death (death benefits) or to have
                                                                   pay death benefits to a SIS dependent or the
considered it but have total trust that the surviving
                                                                   executors of the estate of the deceased member. So
trustees of the fund will do the right thing.
                                                                   being the trustee of the fund, as in the Katz v
In Katz v Grossman, at the time of his death, Mr                   Grossman case, can be a very important role.
Katz and his daughter were the trustees of Mr
                                                                   However, if a fund trustee pays death benefits to the
Katz’s SMSF. The trust and superannuation law
                                                                   executors of a deceased member under the
permitted the surviving daughter to appoint her
                                                                   superannuation laws, those benefits will typically form
husband as her co-trustee of the fund. As trustee
                                                                   part of the residue of the estate and be distributed
and as there was no binding nomination about the
                                                                   accordingly, unless of course specific provision has
payment of Mr Katz’s death benefits, they then
                                                                   been made for them under the will.
applied Mr Katz’s death benefits for the daughter’s
benefit to the exclusion of her brother. The court                 However, without a binding nomination they cannot be
held that this conduct was legal.                                  specifically gifted unless they first find their way into
                                                                   the estate.
Providing the trust deed permits for a nomination,
one can be made either under section                               Do members of a SMSF need to leave a death
59(1A)/regulation 6.17A or in the case of a SMSF,                  benefit nomination?
as a nomination permitted by section 59(1) of the
                                                                   Our view is that members of a SMSF do need a death
superannuation laws. The ATO in SMSFD
                                                                   benefit nomination if they cannot otherwise be certain
2008/D1 supports the view that a member of an
                                                                   that their death benefits will pass in the way that they
SMSF can make a binding non lapsing but
revocable death benefit nomination but only if the                 intend.
trust deed is appropriately drafted.                               Just as a nomination is desirable in getting certainty in
                                                                   the passing of death benefits, in a husband and wife
A section 59(1A)/regulation 6.17A nomination
                                                                   fund for example, where:
must be in the required form and only lasts for 3
years, when it must be renewed.                                    •    there are children and some are under 18 or
A nomination permitted by section 59(1) needs                           otherwise dependant on the member (including
only to comply with the terms of the trust deed and                     financially) and some are not;
can last indefinitely.                                             •    the family relationships are harmonious; and
Our view is that a nomination permitted by section                 •    all members of the family can be trusted to work
59(1) is preferable for a SMSF, as it requires less                     together in reaching the desired outcome (with
formality and because it does not have a 3 year                         parity in an after tax sense);
limited life. However, the trust deed must permit
for it to happen. If it does, typically the trust deed             not having a nomination may not be fatal.
will permit a member of the fund to make a                         In an appropriately structured will and given a
nomination under their will or separately in writing               harmonious family unit, the absence of a nomination
to the trustee.                                                    can actually leave the family with greater flexibility in
Even though a nomination can be made by a will,                    managing the tax effective passing of wealth on death.
technically, superannuation benefits do not form                   It must be kept in mind that once made and unless
part of the personal assets of a deceased                          revoked, a nomination may not take into account the
member, like say an interest in a family home                      changing circumstances of the member.
would. If the SMSF trust deed permits, in the case

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Binding death benefit nominations and SMSF’s
post the ATO’s finalisation of SMSFD 2008/D1 continued                                                                             February 2008

Therefore, not only should they never be made in                              •     Where someone other than a SIS dependent is to
isolation from the estate plan and only then with                                   be benefited, although here, the death benefits
care, they should be constantly reviewed.                                           will first need to be paid to the estate of the
                                                                                    deceased member and the will must make the
When might a binding                           death         benefit
                                                                                    gift of those benefits.
nomination be appropriate?
                                                                                  Of course the fund's deed could leave the trustee
A non exhaustive list of situations in which a death
                                                                                  enough discretion as to how the death benefits can
benefit nomination might be appropriate is:
                                                                                  be paid and assuming the surviving trustee does
•    At any time if the member can’t be assured of a                              what the deceased would want and does it tax
     fair outcome without it.                                                     effectively, the same result can be achieved without
                                                                                  a nomination. This may still require an equality
•    If the fund consists of more than a husband                                  mechanism under the will.
     and wife. A nomination ensures that the death
     benefits end up where the deceased wants                                     What should you do when using a nomination?
     them to go without the need to get trustee                                   If you want to leave a nomination, make sure that:
                                                                                  • your SMSF trust deed permits them;
•    In a husband and wife fund where there is a
     lack of trust between them.                                                  • you comply with the terms of the trust deed and
                                                                                    the superannuation law in making it;
•    Where provision is to be made for children
     when both spouses die, particularly in a                                     • it aligns with what you want to achieve in passing
     blended family or where not all children are                                   your wealth on your death, including under your
     trustees or relationships between children are                                 will; and
     not harmonious.
                                                                                  • you constantly review it for its currency.
A nomination can be used to ensure that the death
benefits pass in the way the parents want.                                        Author Damian Scroope
If there are tax dependent and non tax dependent
children, the nomination can also be used to
ensure that the benefits pass not only fairly but tax
If equality is to be reached, a clause that leaves a
legacy to non tax dependent children can cope
with the different tax treatment of the payment of
death benefits to tax dependents and non tax
dependents. This mechanism not only ensures
equality but can avoid stamp duty problems in
otherwise trying to get equality outside the terms
of the will.
 •    Where unequal provision is to be made and
      death benefits are to be used to do it and
      particularly where not all of the recipients are
      trustees of the fund.

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