If you and your partner have a self-managed superannuation fund (SMSF), you have probably spent considerable time deciding how to invest your superannuation and provide for your retirement.

But have you considered what will happen to your superannuation if you die?

For many couples, their SMSF represents a substantial part of their overall wealth. Making sure that your superannuation goes to the people you want to receive it is an important part of estate planning.

An SMSF death benefit nomination can help achieve this. However, simply completing a nomination form is not always enough. The nomination needs to comply with the fund’s trust deed and superannuation laws.

Here are some important things to consider.

What is an SMSF death benefit nomination?

When an SMSF member dies, their superannuation benefits need to be paid to an eligible beneficiary or their estate.

A death benefit nomination is a direction or expression of preference by a member about who should receive those benefits.

Depending on the SMSF trust deed, a nomination may be binding or non-binding. It may also be possible to make a non-lapsing binding nomination.

Importantly, the rules applying to SMSFs can differ from those applying to ordinary retail and industry superannuation funds. You should not assume that a nomination form downloaded from the internet will be suitable for your SMSF.

Binding and non-binding nominations

A binding death benefit nomination requires the SMSF trustees to distribute the deceased member’s benefits in accordance with the nomination, provided it is valid and the nominated beneficiaries are eligible to receive the benefits.

A non-binding nomination tells the trustees who the member would prefer to receive their superannuation. However, the trustees retain discretion about who actually receives the benefits.

This distinction can be particularly important where the surviving member of a couple is also a trustee of the SMSF.

A non-lapsing binding nomination is designed to remain effective indefinitely rather than automatically expiring after a specified period. Whether this type of nomination is available, and what requirements apply, depends on the SMSF trust deed and applicable rules.

It is important to check the wording of your trust deed rather than assume that your nomination will remain valid indefinitely.

Who can receive your SMSF death benefits?

Superannuation law restricts who can receive a death benefit directly.

You cannot necessarily nominate anyone you wish. For example, if you want your superannuation to benefit a financially independent adult sibling, you may need to consider directing the benefit to your legal personal representative so that it can be dealt with through your estate.

What happens if you have no valid nomination?

If you die without a valid binding nomination, the SMSF trustees may have discretion to decide who receives your death benefits, subject to the trust deed and superannuation laws.

This can create difficulties, particularly where the surviving trustee has different views from the deceased member’s intended beneficiaries.

A properly prepared nomination can help reduce uncertainty and the potential for disputes.

How does your nomination affect your will?

One of the most common misunderstandings about superannuation is that your will automatically determines who receives your SMSF benefits.

This is not necessarily the case.

Superannuation generally does not form part of your estate unless it is paid to your legal personal representative. Consequently, even if your will says that your entire estate is to be divided equally between your children, that does not automatically mean your SMSF benefits will be distributed in the same way.

If you nominate your legal personal representative, the death benefit can be paid into your estate and distributed under your will. This may be useful if you want your superannuation to be distributed as part of your overall estate or to be dealt with through testamentary trust provisions in your will.

Your SMSF death benefit nomination and your will should therefore be considered together.

What about reversionary pensions?

Some SMSF members receive their retirement benefits as an income stream or pension.

A reversionary pension arrangement allows an eligible nominated beneficiary, commonly a surviving spouse, to continue receiving the pension after the member dies, rather than simply receiving a lump sum.

This can be an important estate planning consideration for couples who want to provide ongoing financial support for the surviving partner.

However, reversionary pensions have their own requirements and need to be properly established under the SMSF’s governing documents.

Who controls the SMSF when a member dies?

This is a particularly important consideration for SMSFs.

Many couples operate their SMSF through a corporate trustee, with each partner acting as a director of the trustee company.

When one member dies, consideration needs to be given not only to who receives their superannuation but also to who will control the SMSF.

For example, will the surviving spouse continue as the sole director? Will another person, such as an adult child, become a director? How will decisions be made if beneficiaries have competing interests?

These issues can become complicated where there are children from previous relationships or disagreements within the family.

Estate planning for an SMSF should therefore consider both the distribution of death benefits and the succession of control of the fund.

Should you review your nomination?

Absolutely. Your nomination should be reviewed whenever your personal or financial circumstances change.

It is sensible to review your nomination periodically, even if nothing significant has changed.

Are there tax consequences?

Yes. The tax treatment of an SMSF death benefit can depend on who receives it and whether it is paid as a lump sum or pension.

The tax implications should be considered when deciding how your death benefits should be distributed.

Getting legal advice about your SMSF death benefit nomination

An SMSF death benefit nomination is an important part of estate planning, particularly where you and your partner have accumulated substantial superannuation savings.

If you operate an SMSF with your partner, it is worth taking the time to ensure that your death benefit nominations are properly prepared and form part of a coordinated estate plan.

Contact Mid Mountains Legal now for free, no-obligation telephone advice about preparing or reviewing your SMSF death benefit nomination as part of your estate planning.