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  • Nathan Fradley

Binding Death Nominations - The little big thing in your Financial Plan


Correct Beneficiary

Introduction

Getting the right Superannuation beneficiary is a small but crucial detail often overlooked within our overall financial plan. These seemingly minor choices can have significant repercussions if handled poorly.


In this blog, I will discuss what they are, how they work, and some common mistakes people make, to help you understand why it's important to get this right.


Specifically I will be referring to Superannuation Death Nominations, as there are some you can make on other financial products such as life insurance that don't follow the same rules.


What is a Binding Death Nomination?

A Binding Death Nomination (BDN) is a directive within your Super that specifies who will receive your money when you pass away. This legal declaration must be followed by your Super fund (trustee). It is extremely important and powerful as it can bypass your will, leaving any money you have in Super separate from your estate.


So Who Can Be a Beneficiary?

Many people get this wrong. They log into their Super account online and fill in the names of a friend or maybe a sibling in their Beneficiary position. However, there are specific individuals who are legally allowed to be your Beneficiary of your Superannuation, and if you get it wrong, the Super fund decides. How you allocate this money also affects the tax paid when they receive it.



Super beneficiaries include:

  • Your Spouse (Defacto or Married)

  • Your Children

  • Financial Dependent or Interdependent (This can be a high bar to meet)

  • Your Estate – known as your Legal Personal Representative


Beneficiaries do not include

  • Parents (who are not dependent/interdependent)

  • Siblings  (who are not dependent/interdependent)

  • Your best friend  (who is not dependent/interdependent)

  • Your dog or cat.

Where you have nominated an ineligible beneficiary, your whole nomination is invalid, although the super fund may look at who else you listed to make the decision.


Although we have no formal death tax in Australia, there is tax on Superannuation for certain beneficiaries, known as Tax Dependents. These include


  • Your Spouse (Defacto or Married)

  • Your Children under 18 years of age

  • Financial Dependents or Interdependent


You should consider this as part of your Estate Plans, and if you want to minimise tax balance your nomination with your Wills directions.


Types of  Binding Death Nominations

  1. Non-binding Nomination: This is essentially a suggestion to your Super fund, but they have a say on where the money goes, equivalent to not having a beneficiary.

  2. Binding Nomination: Compels the trustee to distribute your superannuation benefits exactly as specified, provided the nomination is valid and current at the time of your death. These expire every 3 years.

  3. Non-lapsing Nomination: Similar to Binding nominations but do not expire. This can be very useful where you have concerns about capacity, or you don’t see your situation changing. Not all Superannuation funds offer these so you will have to check with your Super fund or Adviser.

  4. Reversionary Nomination: Seen with pension accounts and annuities, this allows your pension payments to continue being paid to a nominated beneficiary (usually a spouse) upon your death. These are very effective when you are funding your joint retirement with combined assets and are usually non-lapsing.


Choosing the right option comes back to your specific circumstances, and also whether your Super fund actually allows the various options.


Red Flags for your Binding Death Nominations

There are a few things you need to watch out for with your Super Beneficiary nomination to avoid disaster:

  • Not having one/Non Binding: If you have not signed anything when making your nomination, it is likely non-binding and merely a suggestion. This means the Super fund gets to decide where the Super goes, and while they may ask for feedback, you cannot challenge their decision.

  • Expiration and Renewal: Many are unaware that binding nominations typically expire after three years. Make sure if yours lapses you update it to keep it in force.

  • Nominating Ineligible People: It is common to see ineligible beneficiaries listed, such as “I give 75% to my husband and 25% to my sister,” which makes the beneficiary invalid. This leaves the decision to your Super fund.

  • Not Updating When You Separate: Your former spouse is an eligible beneficiary, so ensure if you are separating that you update this immediately. This is a very real risk for a lot of people who forget this detail.

  • Inconsistency with Wills: Contradictions between your will and your Super Nomination can lead to confusion and frustration for your beneficiaries. Remember, Super may not be included in the will, resulting distribution against your wishes.

  • Lost Capacity: Once someone loses capacity they can no longer update their beneficiary. This includes if their Power of Attorney does it for them, even if it is to restate the former nomination. This can cause a lot of issue with older people, particularly in Aged Care.

  • Not Getting Advice: It is recommended to complete your Death Nomination alongside your will, with advice from your Estate Planning lawyer.


In closing

The Binding Death Nomination is a powerful tool in estate planning often dismissed as 'it’s fine.' It ensures that your assets are distributed swiftly and according to your wishes, providing peace of mind to you and your loved ones, and can cause chaos if done incorrectly.

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