July 2020

What are they?

Death benefit nominations are offered by many super funds to allow members to nominate who they would like to receive their super benefits in the event of their death.

Why are they important?

Under the Superannuation Industry (Supervision) Act 1993 (SIS), the trustee of a super fund is generally required to cash a member’s benefits as soon as practicable after the member’s death. Benefits may generally be paid to one or more of the member’s SIS dependants or their legal personal representative (LPR) (ie the estate) subject to the fund’s governing rules. If paid to the member’s estate, the proceeds are distributed according to the member’s will (if there is a valid will), or intestacy rules.

Death benefit nominations enable a member to have a say in how their super should be distributed after they die.  Depending on the type of death benefit nomination (see below), the trustee of the super fund may be obliged to follow the nomination, or simply take it into account when making payment.

Do all funds offer death benefit nominations?

Not all funds offer death benefit nominations. The requirements for paying death benefits depends on the governing rules of the fund.  Depending on a particular fund’s rules the member may:

  • be able to make a nomination that binds the trustee, effectively giving the member control over who receives their benefits
  • be able to make a non-binding nomination, where the trustee takes the member’s preference into account, but makes the final decision itself, or
  • not be able to make any nomination at all and the payment of the benefit may be subject to trustee discretion and/or the fund’s governing rules. For example, the rules of the fund may require death benefits to be paid to the member’s estate.

Nominations that bind the trustee

Some funds allow members to make a ‘binding nomination’.

Binding nominations are prescribed in super law and typically lapse after three years unless the member has renewed the nomination. Provided the nomination meets certain conditions, has not expired and the nominated beneficiary is a SIS dependant or LPR, the trustee may be bound by the nomination under super law.

In some funds, including SMSFs, a member may be able to make a ’non-lapsing nomination’. If the trustee consents to the nomination, and the nominated beneficiary is a SIS dependant or LPR, the trustee may be bound by the nomination under the fund’s rules. Non-lapsing nominations, as the name suggests, are typically not required to lapse after three years, and may be effective indefinitely in some circumstances.

Can a member/beneficiary choose the form in which the death benefits are paid?

Typically a binding or non-lapsing nomination specifies who the trustee must pay, but not the form of payment (ie lump sum, pension or combination). The trustee will typically determine the form in which the benefits are paid, but in some cases the beneficiary may be able to choose the form of payment, provided they are eligible to receive a death benefit pension under super law.

Some funds also offer nominations that require the trustee to pay a pension to the beneficiary, subject to them being eligible to receive a pension. For example, a fund may offer child pension nominations which direct the trustee to pay death benefits to a member’s child as a pension.

Reversionary nominations

When a member commences a pension from a fund, the fund may allow the member to nominate a dependant (usually the spouse) to continue to receive the pension after the member’s death. This type of nomination is known as a reversionary beneficiary nomination and is usually binding on the trustee, provided the nominated beneficiary is eligible to receive a pension.

Issues to consider when making a death benefit nomination

Different tax treatment may apply to death benefits paid as a lump sum, depending on whether the beneficiary is a tax dependant or not.  This treatment should be considered when making and reviewing a nomination.

In addition, from 1 July 2017, a limit, called the transfer balance cap, applies to the amount that can be used to commence a pension, including death benefit pensions. The amount of the death benefit that can be used to commence a pension may depend on:

  • the beneficiary’s available transfer balance cap
  • whether or not the death benefit pension is reversionary or a new pension
  • whether or not the beneficiary is a child who is under age 18, between age 18 and 25 and financially dependent on the deceased or permanently disabled, and
  • in some cases, the circumstances of the deceased.

For more information see the ATO’s LCR 2017/3.

The transfer balance cap rules should be considered when making and reviewing nominations involving death benefit pensions to ensure the beneficiary does not incur unnecessary penalties.

More generally, to avoid any unintended consequences, nominations should be reviewed regularly and updated as an individual’s circumstances change, and should be considered as part of a broader estate plan.

Useful references

·     Macquarie Big Black Book: Super & estate planning section

·     Macquarie Fastfacts: Meaning of dependant for super and tax purposes

·     Macquarie Fastfacts: Meaning of spouse for super and tax purposes

·     Macquarie Fastfacts: Meaning of child for super and tax purposes

·     ATO Law Companion Ruling LCR 2017/3 Superannuation reform: Superannuation death benefits and the transfer balance cap

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