To Bind or Not to Bind – That is the Question

Superannuation death benefits payable on the death of a member of an SMSF are not an estate asset unless paid into the deceased member’s estate. The ultimate disposal of a death benefit is dependent on the terms of theSMSF's deed and whether or not a binding or non-binding nomination is in place. A common issue is whether to use a binding or non-binding nomination form.

Sometimes nominations are made binding while other times they are deliberately not, as different considerations apply. Non-binding allow for trustee discretion for changed law or circumstances.  On the flip side, the main advantage of a binding nomination is certainty; i.e. if a wife or husband is nominated she/he is sure to receive the proceeds – the solution is simple and certain. But the question arises, though, is whether this is ideal in all circumstances.

With stable families with young children, the tendency is to make the benefits payable to the estate with a binding nomination so that the proceeds are then paid into a superannuation proceeds estate trust within the Will. This arrangement works well if the estate is limited to the spouse and dependant children so that the money paid into the estate trust is not subject to tax.

Binding nominations may be considered in the following circumstances:

• If estate claims are a risk
• The member wants the benefits streamed to some and not others (such as where the member considers that they have already made adequate provision for some beneficiaries through assets or cash pre death, or through an adjustment or “hotchpotch” provision within the Will) or
• If the member is concerned that the trustees may not direct the proceeds as the member wishes.

It is important to be aware, however, that if the dependant(s) receives the super lump sum directly and then invests it, he or she will pay tax on the income derived which may be a tax disadvantage if the investment income could otherwise have been paid into a special purpose trust within the Will and the income split over a number of beneficiaries, including children.

Trust Deed update

SMSF Trust Deeds created more than two years ago may require amending or updating in order to accommodate binding death benefit nominations and lump sum payments. Please contact our office for further information.