The Great SMSF Will v BDBN Debate – The truth plus SMSF Testamentary Trusts

The Commissioner has stated on several occasions that the super laws that establish binding death benefit nominations (BDBN) – do not apply to SMSFs. Particularly in SMSFR 2009/3 which states that:

“Section 59 of the Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR) regulation 6.17A do not apply to SMSFs. This means that the governing rules of a SMSF may permit members to make death benefit nominations that are binding on the trustee.”

This means that before any death benefit nomination or direction is made, the trustee of the fund, the member concerned and their advisor should review the current SMSF deed and governing rules to assess what type of death benefit nominations, if any apply. Remember if the trust deed is silent on the matter, no death benefit nomination is applicable. In addition, if the trust deed provides that the trustee may make a binding death benefit nomination in accordance with the SISA, then as the death benefit nomination rules under SISA do not apply to SMSFs, this clause has no meaning and once again, the trustee cannot offer a member a binding death benefit nomination. This is why there have been so many Court cases on BDBNs as the laws were put in place for industry and retail super funds and not SMSFs.  So trying to force SMSFs into SIS Reg 6.17A has spelt disaster.

In contrast, a SMSF Will, the Abbott & Mourly Lawyers style, is a suite of six binding directions and distribution of death benefits which includes a special purpose SMSF testamentary trust which is created from the SMSF Will and NEVER from the Will.  This affords protection from family provisions litigation that may take place in relation to the deceased member’s Will.

What is a SMSF Will?

A SMSF Will is an important legal document that becomes part of the governing rules of the fund detailing how a member seeks to provide superannuation death benefits to their dependants, non-dependants or legal estate in the event of their death. There are a range of possibilities in a SMSF Will including:

-the provision of a superannuation lump sum — by way of cash or specific assets to dependants and/or the deceased member’s legal estate;

-the installment of the Executor as Trustee or director of the Fund’s corporate trustee;

-revocation of prior BDBN’s and estate planning directions;

-the payment of a superannuation income stream to dependants (as defined for taxation purposes) of a deceased member subject to SISA;

-the payment of a reversionary superannuation income stream to a dependant subject to SISA. A reversionary pension is the continuation of an existing superannuation pension that was payable to a deceased member of the fund;

-the payment of an adult child dependants benefits directly to the child or to a SMsf Testamentary Trust to protect the benefits and protect from any legal challenge to the estate;

-where a member of a SMSF has more than one superannuation interest in a fund consisting of varying tax-free/taxable components — the choice of allocating from these interests to various dependants and non-dependants;

-the appointment of an adviser or accountant to administer the SMSF estate.

Note: A SMSF Will is a defined set of procedures and requirements purpose built into a SMSF trust deed to allow a member to provide specific benefits, assets, and otherwise direct what is to happen to their superannuation benefits in the event of their death. Not all superannuation fund trust deeds have the capacity to offer comprehensive and strategic SMSF estate planning or a SMSF Will. Further, as the SMSF Will is governed by the SISA if there is a breach by an existing trustee or an adviser to the SMSF there is recovery action for loss or damages by any dependant concerned. If the breach was fraudulent there is potential five years imprisonment. It is strong, safe, and secure.
On Tuesday 22 February 2022 at 12pm we will be looking at BDBNs, the cases where they have been held invalid, the latest High Court case on BDBNs, the comparison of a SMSF Will to a BDBN, why lawyers get SMSF Wills wrong or don’t understand them. Registration for this FREE webinar gives you one hour of FASEA, SAPEPAA, and Tax Practitioners Board CPD.

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