News

Non-lapsing Binding Death Benefit Nominations

Jack Conway
Will Disputes

Australians have $2.7trillion invested in superannuation. For most Australians their superannuation interest will form one of the largest assets, and may exceed the value of the family home. Additionally, most superannuation funds provide life insurance which will frequently increase the potential benefit by hundreds of thousands of dollars where a person passes away unexpectedly.

Our clients are frequently concerned with making sure their superannuation passes to the right people upon their death, and with as little tax as possible. However, most are surprised to learn:

  • Superannuation benefits are not automatically dealt with in a person’s will. Instead, you need to nominate your beneficiaries directly with the superannuation fund through a ‘death benefit nomination form’ (DBN);
  • A DBN may not be binding on the superannuation fund, which means that your stated wishes may not be followed. In order to bind the fund, the nomination must be a specific type of DBN known as a ‘binding death benefit nomination’ (BDBN);
  • Generally, BDBNs expire every three years and must be consistently renewed;
  • If there is no BDBN, it is the superannuation fund that decides who receives your superannuation benefits, and in what proportions;
  • If there is no BDBN, family members can mount a legal challenge to the payment of superannuation benefits through the Australian Financial Complaints Authority (AFCA).

BDBNs expiring every three years has long been an issue for fund members, as their stated wishes may become invalid simply through not being aware of the expiry period or failing to paying close attention to the deadline. However, the three-year period is required by superannuation legislation.

Some funds now offer ‘non-lapsing BDBNs’, which aim to avoid the three-year lapsing problem.

Non-lapsing BDBNs—some technical stuff

The Superannuation Industry (Supervision) Act 1993 (SIS Act) and the SIS Regulations generally restrict superannuation funds from being directed by their members to do particular things with their money. Allowing a member to make a BDBN is a specific exception to this.

Regulation 6.17A provides how a BDBN must be made, including that the notice:

  • is in writing;
  • is signed by a member in the presence of two witnesses;
  • will expire after 3 years.

While there was initially some doubt about the ability of funds to offer BDBNs except in accordance with the provisions of r 6.17A, there is now widespread adoption of ‘non-lapsing BDBNs’. This is because s 59(1) of the SIS Act allows a member to give a direction to a superannuation fund where the nomination is subject to the fund trustee’s consent.

Not all funds offer non-lapsing BDBNs. Those that do will have a provision in their trust deed, and it is extremely important to consider the terms of the deed closely as this is the entire basis of the power. The trust deed may set out conditions or procedures that must be followed, and a failure to adopt these may be fatal to the validity of the non-lapsing BDBN.

Application by BT Funds Management Ltd [2017] NSWSC 45

The BT Funds case was an application for judicial advice in respect of the BT Wrap Retirement Super Deed. In that case, both the Deed and the non-lapsing notice stated that the trustee would give its ‘conditional consent’ upon receipt of a signed form.

On the member’s death, the deed required the trustee to make its consent ‘absolute’ unless certain events had occurred, which included a person having married, entered a de facto relationship, separated from a spouse or partner, or had a child with a person other than their spouse or child. Of note is that it was not necessary that the change in the member’s circumstances effect the nomination, i.e. if the nomination had said that the deceased’s children benefit, and afterwards the deceased separated from a spouse, this may still invalidate the nomination.

In this case, the deceased had separated from a de facto spouse after making the non-lapsing BDBN. The court accepted that the fund was not bound to follow the non-lapsing BDBN form, and could make its own decision.

Conclusions

While non-lapsing BDBNs are a welcome development, it is important to consider their particular terms and not make any assumptions about their ongoing validity.

Things to consider are:

  • What conditions or procedures apply under the superannuation trust deed? If a non-lapsing BDBN can be made invalid (such as in the BT Funds case), is the invalidation automatic or at the option of the fund?
  • How is a member assured that the trustee has consented to their nomination? If no notice or resolution is provided to the member, it may not know. While some trust deeds simply provide that a trustee’s consent will be automatic upon receipt of the form, APRA has previously considered that such a provision is unlikely to comply with the regulations.
  • When does a trustee give their consent? Can a trustee revoke their consent at any time, and what obligations do they have to advise the member of this?

Michael Clohesy & Jack Conway