Australian Financial Review
5 December 2016
Blended families are complicated enough in life. But things can get a whole lot more complex after death. That’s because there are different rules for superannuation that not even the most carefully documented will can cover.
Super does not form part of your estate and so cannot be provided for in your will. Under super law, when you die your death benefit can only be paid to your “dependents” – your spouse and children.
Consider this situation: Jim* moved in with Anna and her two young children nine months ago. He and his wife Susan separated three years ago but are not yet divorced, and they have two adult children.
When Jim dies, his “first” family assumes his substantial super balance will go to them.
But, explains Peter Bobbin, managing principal of Argyle Lawyers, it could go either way. “The definition of ‘spouse’ under the SIS Act includes a person who is married to the deceased at the date of death, however it also includes a person who is in a bona fide domestic relationship with the deceased as at the date of death,” Bobbin notes.
Super law does not require the usual two-year “de facto” time period for someone to be considered a spouse. “Conceptually, if a couple have fully committed to each other and are living together as a couple, one night is enough!” adds Bobbin.
“The definition of spouse under the SIS Act means that the de-facto spouse of nine months could receive the deceased’s death benefit rather than the deceased’s children.”
Lawyers call this the “blow in” problem and it’s just one of a series of ways your super may not end up in the hands of the people of your choice.
So how do you ensure your super benefits go to the right beneficiaries?
It’s vital, says Andrew Yee of HLB Mann Judd, to set up a binding death benefit nomination (BDBN) that specifies the beneficiaries of your super benefits when you die.
“On death, the trustee of your super fund must follow your BDBN instructions and cannot deviate and pay non-nominated beneficiaries such as stepchildren, or ex-partners,” explains Yee, director of superannuation at HLB Mann Judd.
Bobbin says don’t be fooled by “a mere nomination”. “For it to carry out your wishes, it must be binding – ie, binding on the trustee who must follow whatever the nomination may say.”
If a BDBN is not in place, Yee says, the super fund trustee has the discretion to pay the deceased super death benefits to whomever they please, provided that person is a death benefit dependant.
“Interestingly the SIS Act that governs super fund trustees states that a person’s death benefits can only be paid to their ‘dependant’ on death, yet the definition of ‘dependant’ does not include an ex-spouse, but would include a stepchild,” he says.
So without a BDBN, the trustee could not pay the death benefit directly to an ex-spouse, but they could pay it to a stepchild provided the deceased’s current spouse is still alive.
Colin Lewis, senior manager of strategic advice at Perpetual Private, points out that even where you may think there’s a binding nomination in place, you’ve got to follow the rules strictly or it can be disregarded.
For a start, it must be signed and dated by you in front of two witnesses, both over the age of 18 and neither a nominated beneficiary. There also has to be a declaration (signed and dated) that the nomination was signed in front of two witnesses. And most (unless they are non-lapsing) are only valid for three years, so you’ll need to update regularly.
Further, Lewis says, you can only nominate a dependant, as defined by super law, or their legal or personal representative – generally the executor – as a beneficiary. Under super law, a dependant includes a spouse, whether legal or de facto, children whether under or over 18 (albeit tax may apply for kids over the age of 18), financial dependants and inter-dependents. A former spouse is not regarded to be a dependant.
If you’ve nominated a legal or personal representative, you’ll need to take a few extra steps to ensure this person is able to carry out your wishes. In the case of a self-managed super fund (SMSF), you need to ensure that the trust deed has a provision that includes this person as a trustee. “This incorporates them into the running of the fund rather than it being left to chance,” Lewis says.
Yee says a common problem is where SMSF trustees want their death benefits to go to, say, a second spouse as a reversionary pension for as long as they live, and then for a lump sum to be paid to their own children.
“A BDBN may not be effective in this scenario, as when the deceased’s benefits revert to the surviving spouse, the death benefit becomes an asset of the surviving spouse and they could potentially decide who receives the end benefit upon their death,” Yee says.
A better option, he suggests, is to arrange to have the SMSF converted to a small APRA fund on death. That way an independent trustee would be appointed to administer the fund and enforce the death benefit wishes.
“Or they may arrange to ‘hard wire’ the SMSF trust deed with a specific clause that prevents their death benefits passing to unintended parties. This scenario is definitely one for the lawyers,” Yee says.
Bobbin says with SMSFs, even where there is a binding death nomination, caution should be taken in terms of trustees. As he says, “he, or she, who controls the bank account holds one of the keys to death benefit power”.
“If the deceased’s new partner becomes the trustee of the SMSF, or becomes in control of the trustee company of the SMSF, perhaps because they are the remaining director of the trustee company, then he or she may have the ultimate discretion to pay the death benefit to themselves and not the children of the deceased,” Bobbin says.
*Example provided by Argyle Lawyers.