What is a BDBN?
A Binding Death Benefit Nomination (BDBN) is a legally binding nomination that allows a member of an SMSF, to advise the Trustee as to whom they want to receive their superannuation entitlements in the event of their death. The nomination must be valid in order for it to be binding and you can nominate one or a number of dependants to receive the benefit.
When is a BDBN not Valid?
Within the industry, common errors causing the BDBN not to be valid are as follows:-
Not dated correctly;
Not witnessed correctly;
Not prepared in the way prescribed by the Fund’s Deed; and
The people nominated are not actually dependants (spouse, de facto spouse, child or a person in an independency relationship).
When does the BDBN need updating?
If you no longer want your superannuation benefits to pass to the dependants nominated on your BDBN OR if there have been significant changes in the way your Fund is structured.
Significant superannuation changes came into effect on 1 July 2017. The importance of putting a BDBN in place or updating an existing one is highlighted by the following example.
John is aged 68, is fully retired and does not have a BDBN as at the time of preparing his last Will in 2018, his Estate planning Lawyer advised it wasn’t necessary. Prior to 30 June 2017, 100% of his superannuation benefits were in pension mode and his pension was reversionary to his wife i.e. on his death, the pension automatically reverts to his wife and does not form part of his Estate.
Under the new superannuation regime, John was required to rollback $2.4m of his pension to his accumulation account. John does not have a BDBN.
Unfortunately, in November 2018, John unexpectedly passed away. His pension account automatically reverted to his wife, however, his accumulation account, which at the date of his death had a value of $2,650,000, will form part of his Estate as he didn’t have a BDBN.
Why does this matter?
Wills can be contested. By having this substantial amount form part of the Estate, you are increasing the size of the ‘pool’ that can be contested.
It can force more money out of the superannuation environment, when it may have been more tax effective to leave it in superannuation.
The superannuation benefits may end up with someone other than your spouse i.e. adult children or other people listed in your Will and this may not have been your intention. Not to mention the tax implications of superannuation benefits being paid to non-financial dependants.
How do we avoid this problem?
Simple. Ensure that your estate planning is up to date. We maintain that your entire Estate Plan should be taken into account when considering these matters and for that reason we highly recommend consulting your Estate Planning Lawyer as opposed to considering your superannuation benefits in isolation.
If you would like to know more about BDBNs and how to avoid issues within your SMSF, contact the team at MRG Redshaw today on (07) 3221 4004 or firstname.lastname@example.org.