31/10/2017

A tailored or "conditional" BDBN is one which is subject to one or more special conditions which can make it a useful tool to deal with a variety of modern estate planning issues.

One of the most common conditions is to impose a succession of nominees in case the primary nominee fails to survive the fund member or otherwise fails to remain (or become) an eligible recipient of the death benefit – often known as a “cascading” condition.

The purpose of the successive nominations is to ensure that the member’s superannuation death benefit (or part thereof) does not become subject to the discretion of the fund trustee, and hence potentially wind up in the hands of someone that the fund member would not wish to benefit.

However, the ability to make a tailored BDBN under the terms of a retail or public offer superannuation fund is usually extremely limited.  This is where tailored BDBNs for SMSFs can come in handy.

It is imperative that the trust deed for the SMSF fully and specifically caters for the member to be able to make a BDBN with whatever conditions they might need to impose for their estate planning strategy.  In recent cases the Courts take a very strict interpretation of whether a BDBN has been correctly drafted in accordance with the terms of the particular trust deed.

It should also be remembered that the nominees under a tailored BDBN are limited to persons who are “SIS dependants for example a member’s spouse.  Otherwise, if an individual is not a SIS dependant, the only way they can benefit from the member’s death benefits is indirectly via the deceased member’s estate.

Here’s a few estate planning strategies under which a tailored BDBN can play a starring role:

1.   Dealing with Excess Transfer Balance Cap (“TBC”) Issues

Suppose that a member and their spouse are retired and have pension balances of $1.2 million each.  If they each gave their whole superannuation balance to the other as a pension upon their death then the survivor would end up with $2.4 million of pension benefits which exceeds the $1.6 million maximum allowed.  The excess will be subject to additional tax.

The solution is for each member to make a tailored BDBN to use up the unused balance of the relevant TBC, and then to give the rest of the death benefit to the survivor.  In this way the survivor can receive the maximum tax free pension up to their TBC as indexed, and the balance of their deceased spouse’s superannuation as a tax free lump sum.

2.    Dealing with Uncertain Survivorship Issues

Suppose a member wants to ensure that their surviving spouse will be properly looked after, but their spouse is expecting to receive a considerable inheritance from their parent when that parent dies.  In this event, the member would rather that their superannuation balance be distributed to their children in equal shares.

A member could therefore make a BDBN which says that their death benefit is to support a pension payable to their spouse if the spouse survives the client by 30 days and until the death of the spouse’s parent.  On the death of the spouse’s parent, if the spouse receives an inheritance from the estate of the parent of at least a particular sum or value, then the death benefit pension is to cease and the member’s death benefit is then to be divided equally between such of the member’s children who survive the member by 30 days.

3.    Keeping your Superannuation Away from your Estate

If a member only wants to benefit persons who are the member’s SIS dependants and the member wants to minimise the chance that their superannuation death benefits might end up in the hands of their personal creditors, then making a “SMSF Will” style of tailored BDBN can be a very useful strategy for a number of reasons, including:

•    avoid the potential claims of business or personal creditors;

•    if their personal estate is fairly small, avoid the need for and costs of obtaining probate of their Will;

•    avoid the superannuation death benefit being caught up in any challenges to or disputes in relation to the member’s estate or Will;

•    in States other than NSW, minimise the value of their personal estate that might become subject to a family provision claim.

4.    Maximise Tax Efficiencies for both SIS and Non-SIS Dependants

Having a tailored BDBN can ensure that:

•    a member’s spouse receives the benefit of a potentially tax free pension for the rest of their life;

•    on the death of the spouse, the member’s children then get to share the capital equally between them (potentially tax may be payable);

•    grandchildren or further descendants will be able to benefit from their deceased ancestor’s share of the superannuation death benefits as discretionary beneficiaries of a testamentary discretionary trust established under a member’s Will; and

•    any of those children or further descendants who are minors will be treated as adults for tax purposes and have access to the full marginal tax rate rather than the penalty rate otherwise payable by minors.

These are just a few examples based on these simple scenarios of how tailored BDBNs can be the “Magic Bullet” for SMSF estate planning.  If you would like assistance with establishment of a new SMSF, tailored BDBNs, and other estate planning documents or strategies, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.