Are BDBN’s effective in achieving your estate planning wishes?

Binding Death Benefit Nominations (‘BDBN’) direct trustees to pay death benefits of a member in line with the member’s wishes. They are useful documents that assist in avoiding messy dispute about an estate – however they need to be executed properly to be effective and be in line with the member’s wishes. 

How does a BDBN need to be executed to be effective?

For a BDBN to be valid, it must be:

• Properly executed in accordance with the trust deed;
  
• In writing; and
  
• Must be signed and dates by the member, and by two witnesses. 
  

But the question of validity doesn’t stop there – it is important that the member selects eligible individuals or their estate as their nominees for their death benefit. The superannuation legislation limits to whom death benefits can be paid, which includes:

• The member’s dependents (for superannuation purposes (‘SIS dependents’), which is different to tax purposes); and/or
  
• Their Legal Personal Representative (‘LPR’).
  

It is vital that if the member choose their LPR, the very specific words, ‘legal personal representative’ are used. A death benefit paid to the LPR will be dealt with as part of the estate of the member. 

What is the difference between SIS dependents and tax dependents?

As the list of ‘dependents’ is much shorter on the superannuation side, selecting someone from the tax dependents list will render the BDBN invalid. 

Can I dictate how I want the death benefit made to be paid to my dependents?

Generally, where the trust deed and governing rules of the SMSF allow it, the member can specify:

• Whether the death benefit is to be paid as a lump sum, pension or combination of both;
  
• Segregating a particular asset to be paid to a particular beneficiary – noting that at the time of death, the specified asset needs to be an asset of the fund for the trustee to apply it per the wishes in the BDBN; 
  
• Segregating different superannuation interest to different dependents – for example paying tax-free pension to a non-tax dependent (e.g., a non-financially dependent adult child) and paying a taxable lump sum to a tax dependent. 
  

Does my BDBN last forever?

Depending on the type of BDBN prepared by the member, there are different time frames. 

The types of BDBNs include:

• Binding non-lapsing BDBN
  
• Binding lapsing BDBN
  
• Non-binding BDBN

The key difference between a binding and non-binding BDBN is whether the trustee is ‘bound’ to act by the member’s wishes and whether they can use their discretion in paying the death benefit. As expected, the trustee is ‘bound’ by a valid binding BDBN, but not with a non-binding BDBN.

A lapsing BDBN ends three years from valid execution, and it is important that the member executes a new valid BDBN once the previous one lapses. On the flip side, a non-lapsing BDBN is valid indefinitely, so long as a written revocation or replacement is not made. 

Where the members circumstances change (for example, a marriage breakdown or a spouse passes away prior to the member), it may be prudent to update the BDBN. 

What are some of the issues with BDBNs?

• With ever changing superannuation rules, trustees may decide to update the SMSF’s trust deed or governing rules to be more in line with the current legislation. However, depending on the provider of the trust deed documentation, there may be key differences in what is ‘allowed’ and ‘not allowed’ by the trustee. 
• Losing the SMSF trust deed – which makes it very difficult to ensure that the BDBN is valid and in line with the SMSFs trust deed and governing rules. 
• A BDBN that is inconsistent with the will – this can risk challenge from the party that is disadvantages.
• Appointing a beneficiary of a death benefit as the surviving trustee – it is important to appoint a surviving trustee that is impartial to avoid conflicts.
• Relying on a lapsed BDBN.
• Relying on a non-lapsed BDBN and forgetting about it. 

The trustee needs to ensure that the BDBN’s provided by the member are remain valid despite any changing legislation, personal circumstances or documentation. 

 How can Tax Controversy Partners help you?

 At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and legislation and based on our understanding of likely ATO actions. 

Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.