Can grandchildren be beneficiaries of BDNs?
Often a member of a superannuation fund (whether self-managed, industry or retail superannuation fund) will want to provide for their spouse and, if the spouse should predecease them to their children and, if one of the children predeceases them, to the issue of the deceased child; that is, their grandchildren.
Consider the position of Xander and his wife Xanthe. They have two children, Hector and Lysander, and Hector has two small children, Bert and Elmo.
Xander wishes that his super benefit be paid to Xanthe and should she die first then his benefit is to be paid equally to Hector and Lysander. However, if Hector dies before him, he wishes Hector’s share of the death benefit to be paid to Bert and Elmo (whilst his parents did not watch television, Hector was a fan of Sesame Street).
Xander’s binding death benefit nomination is drafted as follows:
"The death benefit is to be my spouse Xanthe, but if she predeceases me then the death benefit is to be paid equally to my children Hector and Lysander. Should either Hector or Lysander predecease me, the share which should otherwise have been allocated to either of my children shall be paid to their issue in equal portions."
For a gift under a binding death benefit nomination to be valid, the recipient must be an eligible beneficiary of the member making the nomination at the date of death of the member. The eligible beneficiaries are the legal personal representative of the member (that is, the estate of the deceased member), the member’s spouse, the member’s children, any person who was financially dependent on the member and any person who was in an interdependency relationship with the member.
The first contingent gift to Xanthe is valid. She is an eligible beneficiary of Xander as she is his spouse and so Xanthe is eligible to receive the death benefit, if she survives Xander.
The second contingent gift to Hector and Lysander is also valid. They are children of Xander and, as such, they are each eligible beneficiaries of Xander. Assuming Xanthe predeceases Xander, and they each survive Xander, they will be entitled to share the death benefit equally.
The third contingent gift to Bert and Elmo will generally not be valid. They are not the children of Xander (but his grandchildren). The gift to Bert and Elmo will only be valid if they are financial dependents of Xander (grandchildren are not automatically financial dependants of a grandparent) or in an interdependency relationship with Xander at the time of his death (which would be an extraordinary position).
How does the nomination play out on Xander’s death?
If Xanthe survives Xander - the first contingent gift applies (the death benefit is paid to Xanthe). The second and third contingent gifts do not apply and are not considered. Consequently, it is irrelevant whether either or both of Hector and Lysander have survived or died before Xander.
If Xanthe dies before Xander - the first contingent gift cannot apply. Also, as the estate of Xanthe is not an eligible beneficiary of Xander, it cannot be paid to Xanthe’s estate. In this situation, the second contingent gift applies – so that the death benefit is shared equally between Hector and Lysander.
If Xanthe and Hector die before Xander - the first contingent gift cannot apply and the second contingent gift to Hector also cannot apply. Neither gift can operate as gifts to the estates of Xanthe and Hector, as neither estate is an eligible beneficiary of Xander.
The gift to Lysander is valid and can apply so that he obtains 50% of the death benefit.
However, the third contingent gift (to Bert and Elmo) cannot apply as they are not eligible beneficiaries of Xander – as they are his grandchildren and not his children.
The second contingent gift to Hector fails. What happens to this half of the death benefit will depend on the rules applying to the particular superannuation fund. The rules could provide that the failed gift is paid to Lysander (so that he obtains 100% of the death benefit).
Alternatively, the rules could provide that the failed gift is to be allocated at the trustee’s decision as if there was no applicable binding death nomination (to the failed portion at least). Another possibility is that there is a general residual gift to the estate of Xander of the failed 50%.
What should Xander have done?
If Xander wanted the portion of the death benefit which was to go to Hector to be allocated to Hector’s issue, then there should have been a fourth contingent gift in the nomination to the effect that “Should either or both Hector and Lysander predecease me, the portion which, but for their death, would have been paid to them must be paid to my Legal Personal Representative”.
Xander should then have included special provision in this Will to the effect that any superannuation benefit which would have been paid to Lysander or Hector but for their death must be applied for the issue of the deceased child and if there is no issue, to be included in the residuary portion of the estate.
What is the moral?
Simply that grandchildren are not eligible beneficiaries of the grandparent and if the grandchildren are to share in the death benefit, the death benefit must be paid to the estate of the grandparent (technically, their legal personal representative) and the terms of the Will must provide that the death benefit is to be applied to the grandchildren.