Are Tailored BDBNs the 'Magic Bullet' for SMSF Estate Planning?

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.

For example, the BDBN might be made initially all to the member’s spouse, but if the spouse did not survive the member by 30 days then the secondary or back up nominees might be to the member’s children in equal shares. There may even be a tertiary nomination in case none of the member’s children survived the member, in favour of the member’s estate so as to be dealt with under the terms of their Will. In each case, 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 – even to the extent of not allowing the member to nominate more than one level of cascading death benefit nominees.

This is because by and large such superannuation funds do not want the additional administrative hassles of having to keep records of, and then implement - and possibly even monitor on an ongoing basis – individual BDBN conditions on behalf of hundreds or even thousands of members.

So where certainty of determining what happens to a client’s superannuation death benefits is required, and / or the ability to impose innovative and flexible conditions is required for the client’s estate planning strategy, it is almost certainly necessary for a client in a retail or public offer superannuation fund to establish their own SMSF (with an appropriately drafted trust deed) and to roll over their superannuation balance from their retail or public offer superannuation fund into their new SMSF (although if they have a favourable insurance policy linked to their  retail or public offer superannuation fund they may decide to keep a sufficient balance in that fund in order to maintain that insurance, particularly if their medical condition has since adversely changed and / or the insurance was only able to be put into place for them under a group policy).

It is imperative that the trust deed for the new 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. As seen in the recent case of Munro v Munro [2015] (a decision recently approved in Cantor Managment Services Pty Ltd v Booth [2017]), 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 the tailored BDBN are limited to persons who are “SIS dependants” of a fund member, namely the member’s spouse, the member’s children (of any age), or someone with whom the member has an interdependency relationship (usually someone with whom the member has a close personal relationship and lives with, and where one or each of them provides the other with domestic support and personal care). A SIS dependant also includes someone who is a dependant within the ordinary meaning of that term, such as a person who depends on the member financially. 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.

Now that your client has moved their superannuation benefits into a SMSF with an appropriately worded trust deed, what can they do with a tailored BDBN? Here’s just a few estate planning strategies under which a tailored BDBN can play a starring role:

1.    Dealing with Excess TBC Issues

Suppose that your client and their spouse are each retired and have superannuation balances of $1.2 million each, currently fully supporting their account based pensions. They each wish to tax effectively provide for the survivor of them using their superannuation. If they each simply gave their whole superannuation balance to each other as a pension, then the survivor would end up with $2.4 million of pension benefits which exceeds their $1.6 million TBC, so that the excess of $800,000 will be subject to an excess transfer balance tax (being 15% on notional earnings for the first TBC breach and 30% for second and subsequent TBC breaches).

Alternatively your client and their spouse might instead leave their superannuation balance to each other as a lump sum, but this would mean that the survivor would have an unused TBC of $400,000 that could otherwise have supported a tax free pension.

The solution is for each of your client and their spouse 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

We have already seen how a “cascading” BDBN is a type of tailored BDBN that can take into account the possibility that a primary nominee under the BDBN may not survive the client so therefore the client can specify substitute back up nominees to take their superannuation death benefits if the primary nominee has predeceased the client or otherwise is not entitled to receive their gift. Subject to the fund trust deed, this can occur either in a retail fund context or in the SMSF context.

However, under an appropriately worded SMSF trust deed, the possibilities are much wider and more flexible, and can cater for much more specific client instructions.

For instance, suppose your client 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 client would rather that their superannuation balance be distributed to their children in equal shares.

The client could therefore make a BDBN which says that the client’s 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 client’s death benefit is then to be divided equally between such of the client’s children who survive the client by 30 days.

As you can see, the BDBN can be very specifically tailored – which is why tailored BDBNs are sometimes referred to as “SMSF Wills”.

3.    Dealing with Blended Family Situations

Tailored BDBNs are especially useful in the context of blended families.

Suppose the client is in their second marriage, and they have children of a previous marriage. The client wishes to look after their current spouse until their death or subsequent re-marriage, and thereafter the client wants their death benefit to go to their children of their previous marriage.

The client could make a tailored BDBN which provides a pension for their surviving spouse and after the spouse's death the client’s death benefit would then be divided equally between such of the client’s children of the client’s previous marriage who survive the client.

4.    Keeping your Superannuation Away from your Estate

Assuming that your client only wants to benefit persons who are the client’s SIS dependants (such as spouse and children of any age), if the client 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, particularly if the client wishes to:

• Avoid the potential claims of business or personal creditors;
• Where the client’s debts clearly exceed the client’s personal assets, prevent their superannuation death benefits from being dealt with as part of a bankrupt estate;
• 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 client’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 (note that in NSW the making of a BDBN otherwise than in favour of the client’s estate may be a “relevant property transaction” under section 75 of the NSW Succession Act 2006 which can be unwound so as to be able to deem the client’s superannuation death benefits as part of their “notional estate” to be available to satisfy a successful family provision claim).

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

This is where having a tailored BDBN is part of a two-pronged estate planning strategy to ensure that:

• the client’s spouse receives the benefit of a potentially tax free pension for the rest of their life;
• on the death of the spouse, the client’s children then get to share the capital equally between them (they may need to pay some tax on their share, depending on the tax components of the death benefit);
• 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 the client’s Will;
• any of those children or further descendants who are minors will be treated as adults for tax purposes.

Having the relevant share of the superannuation death benefits go into a testamentary discretionary trust also has the added benefit of providing asset protection for the capital in the trust from litigious claims against the discretionary beneficiaries of the trust.

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 require any assistance in this area please contact us on 02 8296 6266 or via email info@supercentral.com.au.

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