The importance of nominating a beneficiary within superannuation is quite often overlooked by clients and financial planners. This is particularly concerning for people who have complicated family arrangements, such as previous marriages and children to different partners. It is also important for single people with no clear dependants.
Failure to nominate a beneficiary within superannuation can lead to a delay in payment, frustrations and lengthy disputes which can be costly to the potential beneficiaries and emotionally draining at a very difficult time.
Death benefit nominations
A death benefit nomination is a notice to the trustee of a super fund, requesting that the member’s benefit be paid to their specified dependants, or their estate, upon their death. Clients should be encouraged to make death benefit nominations within their super fund.
Who can be nominated as a beneficiary?
Upon the death of a super fund member, the deceased member’s benefit can only be paid to their estate or any person classed as a dependant for Superannuation Industry (Supervision) (SIS) purposes, at the time of death.
An SIS dependant includes :
– a child of any age
– a spouse (married or de facto), but not previous spouse
– any person who is financially dependent on the member
– any person who has an interdependency relationship with the member.
An interdependency relationship is where two people have a close personal relationship, live together and one or each of them provides the other with financial and domestic support and personal care.
Types of nominations
Depending on the particular super fund and what the trust deed allows, death benefit nominations may either be binding or non-binding on the trustee.
When a binding nomination is made, the super fund trustee must comply with the wishes of the deceased member, unless the nomination is invalid. The trustee cannot use their own discretion about who will receive the benefit when it is paid. A binding nomination provides more certainty that the member’s intentions are carried out after their death.
A nomination of beneficiary will only be valid and therefore binding, if:
• the governing rules of the super fund and trust deed allow binding death benefit nominations
• each nominee is an SIS dependant at the time of death, or the estate is nominated
• the notice is in writing, and is signed and dated by the member and witnessed by two people, who are not nominees and are aged at least 18
• the allocation of the death benefit to each nominee is clear – and most super funds will require that the allocation totals 100 per cent
• the nomination has not lapsed
Generally, a binding nomination will lapse after three years and needs to be renewed. Some superannuation funds do offer non-lapsing binding nominations, which do not need to be updated or renewed every three years.
A non-binding nomination is where the member of a super fund indicates to the trustee of the fund who should receive their benefit upon their death. However, the trustee is not bound by the nomination and can use their discretion when deciding to whom to pay the benefit.
Non-binding nominations do not normally need to be updated or renewed.
Super fund members may make no nomination at all. In this case, the trustee may either pay their super death benefit to the member’s estate or make their own decision as to who should receive the benefit.
Where there is no nomination made, payment of the superannuation death benefit may be delayed. The superannuation trustee may need to write to potential dependants before making a decision about who the benefit should be paid to. If the member dies without a Will and the benefit is paid to the estate, there could also be a lengthy delay in payment of the super benefit.
When circumstances change
Regardless of whether a binding or non-binding nomination is made, the nomination should be reviewed and updated when there is a change in the member’s circumstances, as the member’s intentions may have changed or the nominated beneficiary may become invalid.
For example, if they nominate a beneficiary and the beneficiary predeceases them, they should update their nomination with a new beneficiary.
Another example is where a married person nominates their spouse to receive their superannuation benefit, and subsequently gets divorced. In this circumstance, their intention may have changed and they may not want their ex-spouse to receive their benefit.
If it is their intention for their ex-spouse to receive their benefit, they would need to nominate them through their estate instead of directly nominating them, as an ex-spouse is not an SIS dependant and would not be a valid nomination.
Case Study – no nomination
Brett, aged 29, had been living with his partner, Tracey, for just three months when he suddenly passed away in an accident. At the time of his death, he had $400,000 in superannuation, which included life insurance of $350,000.
As Brett was young and healthy, he expected to live a long life. He had not bothered to nominate a beneficiary in his super fund and did not have a Will at the time of his death. As Tracey was left with a large mortgage and was Brett’s spouse, she expected to receive his entire superannuation benefit.
However, Brett had two brothers, who also made a claim for his superannuation. They claimed that they were financially dependent on him. The superannuation trustee could pay the proceeds to Brett’s estate or could use their own discretion in deciding whom to pay.
If the brothers or Tracey do not agree with the trustee’s decision, they can lodge a claim with the Superannuation Complaints Tribunal (SCT).
However, this may take a long time to resolve and will be a painful process for all involved at a very emotional time in their life. If Brett had made a binding nomination, this would have ensured that the proceeds were paid to whom he intended and would have removed some of the emotional burden for Tracey and the brothers.
Case study – non-binding nomination
At age 64, Jan, a divorced mother of three children, had $600,000 in superannuation. She owned her own home and was in a relationship with John, aged 67. John decided to move in with Jan but kept his own home. At age 65, Jan passed away.
Prior to her death, she had updated her nominated beneficiaries in her super fund. At the time of her death her three adult independent children were nominated to receive her superannuation benefit equally. Despite the fact that her super fund allowed binding nominations to be made, Jan used a non-binding nomination. She did not realise the difference between a non-binding and binding nomination and did not think it would matter.
Also, she had read that non-binding nominations do not lapse and would not need to be renewed every three years. It was clear that she intended to leave her entire superannuation benefit to her three children evenly.
However, John made a claim on her superannuation benefit stating that he was her spouse and was financially dependent on her. He claimed that he was entitled to receive the entire proceeds, as he was the only person financially dependent on her. As Jan’s nomination was non-binding, the trustee can use their discretion when deciding how to pay the benefits.
There is no obligation for them to pay the super benefit to the three children, despite Jan’s nomination. The superannuation trustee could decide to pay the benefit to either the children or to John, or to all of them. If Jan had made a binding death benefit nomination, her super benefits would have to be paid to the three children, as Jan intended.
In summary, a binding death benefit nomination can provide clients with certainty and reassurance that their super benefit will be paid according to their wishes. By not recommending clients to make a binding nomination, there is high risk that their benefits will be paid to someone other than who they intended.
Crissy DeManuele is technical services manager for Suncorp Wealth Management. Ã‚Â