What is a binding death nomination and is it right for me?
To put it simply, a Binding Death Nomination is a legally binding nomination made by you that allows you to direct your super fund on how to pay your death benefit. If your nomination is valid, the trustee of your super fund must follow your binding death nomination.
One of the requirements in order for a nomination to be valid is to nominate a dependent or dependents. Under superannuation law, a dependent is:
- Your spouse
- Your children
- Your legal personal representative (LPR)
- Any person or persons that are financially dependent on the member
- Any person or persons that are in an interdependency relationship with the member
Without a binding death nomination, a default procedure may take place. For example, it may automatically be spent on the deceased’s estate. Furthermore, the trustee of the super fund may be able to choose at his or her discretion which of the eligible beneficiaries will receive the death benefit.
Generally, a binding death benefit nomination will only remain valid for three years. Therefore, it is important to re-examine it regularly especially whenever your circumstances change.
Are binding nominations for everyone?
As binding nominations must be generally renewed every three years or whenever your circumstances change, they may not be ideal for everyone. In addition, if there is only one sole dependent, then a binding nomination may be inconsequential.
Furthermore, if the person you would like to nominate to receive your super death benefit is not a dependent or your LPR, your binding nomination will not be valid. It would be best to seek other estate planning alternatives.
Binding death nomination and death tax
In a few circumstances, having a binding nomination can create unnecessary death tax. As mentioned earlier, the trustee will lose the discretion to distribute the proceeds in the most tax-effective manner.
An example of this was when our clients, a happily married and healthy couple, drew up binding death nominations leaving half their superannuation to each other and the rest to be divided between their two children.
The husband suddenly died with $4 million in his super fund. Since there was a binding death nomination, $2 million went to his wife and $1 million to each of his children. However, there was a death tax of $300,000. If there had been no binding nomination, the trustee could have paid the entire sum to his spouse tax-free.
Are there non-binding nominations?
Yes, a non-binding beneficiary nomination gives the trustee discretion to protect the interests of the beneficiaries if circumstances change. One example is if one of your beneficiaries is bankrupt, the trustee of your super fund can take this into account and steer clear of putting your super benefit into the hands of creditors instead of your beneficiaries.
However, this is also a disadvantage of a non-binding death benefit nomination. There is no certainty as to who will receive superannuation and pension benefits in the event of death. The ultimate discretion lies with the trustee of the superannuation fund.
Non-binding and binding death nominations are a complex matter. It is best to seek licensed professionals who can help you with estate planning solutions that are tailored to your specific circumstances.