05/06/2018

The question about which of these documents takes precedence if they are both in existence on the death of the member is kind of like “which came first the chicken or the egg” – it’s been around that long and is still asked regularly.

Firstly let’s understand the issue.  

A death benefit nomination is the way in which a member of a superannuation fund advises the trustee how they want their superannuation death benefit dealt with following their death.  Although death benefits can be either binding on the trustee or not, it is only where the nomination is binding that the issue arises as to whether it is the nomination or a reversionary pension set up by the member during their life that takes precedence.

A reversionary pension is a pension commenced by the member where they advise the trustee that when they die they want the pension to be continued and to be paid to their spouse or (if relevant) their minor children (ie the ones under 18), if any.

So what happens if the member has established a reversionary pension and then later sets up a binding death benefit nomination that is wholly or partly inconsistent with the terms of that pension?  Which will apply?

The answer requires a stepped process to be undertaken to ensure all possibilities are dealt with before reaching the final solution.

Let’s check the four steps required.
 
Step 1 – check the terms of the nomination and the reversionary pension to see if they are actually inconsistent or can exist together.  Perhaps when you work it all out they are not inconsistent at all and there is sufficient money to permit both to be followed.  But if not then move to …

Step 2 – are they both valid? Check both documents to ensure that both of them comply with the terms of the trust deed and the relevant law.  If one is not valid then it can be ignored and the other takes effect instead.  But if both are valid then move to …

Step 3 – check the fund’s deed to see if it says which takes precedence.  For example SuperCentral’s deed gives precedence to the reversionary pension.  If the deed gives precedence to one or the other then that position will apply.  But if the deed is silent on the issue then move to …

Step 4 – if the reversionary pension is in existence on the death of the member then the pension amount is not part of the member’s death benefit and can’t be dealt with in a Binding Death Benefit Nomination.

It is sometimes argued that a reversionary pension is invalid because it is a “fetter” or limit on the trustee’s discretionary powers and, therefore, the binding death benefit nomination takes effect.  This argument is incorrect.

When a member creates a reversionary pension they are exercising their rights under the governing rules as to whom to give their money to after their death.  There is therefore no discretion for the trustee to exercise and therefore no ‘fetter’.

The reversionary nature of the pension is part of the original pension terms entered by the member during their lifetime and which was existing at the date of their death.  The Binding Death Benefit Nomination is a nomination relating to who is to receive the member’s available death benefits, but those death benefits can’t include the pension reversion because that money is not available for distribution because it’s part of the original pension.
 
Don’t assume that simply because an inconsistency between the reversionary pension and the death benefit nomination will be resolved in favour of the pension means that the member does not require a death benefit nomination if they have an existing reversionary pension.

A member might still need a Binding Death Benefit Nomination to deal with situations like:

•    the nominated reversionary pensioner has predeceased the member, in which case the “reversion” cannot operate and must therefore be allocated by the nomination;

•    the member has superannuation interests in addition to the reversionary pension (eg accumulation interests or non-reversionary pensions) in which case the BDBN must deal with those other interests;  

•    the survivor’s transfer balance account is in the negative permitting a larger-than-normal amount to flow into that account from the deceased’s death benefit provided the BDBN is drafted properly, or

•    the nominated reversionary pensioner is not eligible to receive the pension benefit (for example, they might have ceased to be a dependant of the member) in which case the nomination will need to appoint an alternative eligible recipient such as the deceased’s estate (legal personal representative).

Death benefit nominations are not just form filling; they are a vital part of a member’s estate planning and need to dovetail with the member’s Will. 

If you want to learn more about what you could achieve with a tailored death benefit nomination contact us at Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au to see how we can assist.