Tara (00:50):
Thank you so much for tuning in to another episode of the Art of Estate Planning podcast. It is Tara here, and I just want to say when I was at Lo Biz Con and got to meet so many people in person, I was absolutely blown away by how many people came up to me and said that they were listening to the podcast.
(01:15):
And I just want to let you know how much that means to me. You guys probably don't know this, but my husband actually has a podcast of his own and every episode gets like tens of thousands of listens and downloads and his is an international audience and it's on a health topic and totally different to this. And I get a couple of hundred downloads every episode and also his podcast has been going for a lot longer. We haven't even been going a year with this podcast, but sometimes I just think, oh, anyone listening to the podcast, is it worth doing? And then when I actually meet people who are listening and tell me that they find it as a useful resource, it just means the absolute world to me friends. So thank you so much to everyone who did come up and tell me that.
(02:09):
And yeah, honestly, it really does mean so much to me and it's so funny if I put a hundred people in a room or a couple of hundred, that's a big room, that's a big party, but we kind of look at these mandatory metrics with social stuff and feel like the numbers don't count. So I just want to let you know that I do really appreciate each and every one of you and I'm so grateful for you tuning in and hopefully today you find to be a bit of an interesting episode. Funny story, I actually already half recorded this and then I realised that the recording had dropped out or there was some tech glitch after five minutes, and I think I'm taking it as a sign because the episode was just getting longer and longer and I was dragging it out and I realised I think this actually needs to be two episodes.
(03:04):
So I am back, I'm rerecording it. Hopefully I remember everything I said the first time. But what I actually want to do is just talk about super and binding death benefit nominations. And this episode I want to just talk about some of the foundational principles and also the common misconceptions around super and strategy. And then we'll come back and do another one about BD bns specifically and whether they are a really vital tool or are they overrated. So here I want to talk about some of the common misconceptions, and I think this is really rooted for me in my frustration about how complicated super is for the average person. I mean, it's complicated for lawyers, but it's complicated for the average person and for a system that is mandatory for anyone working, it's kind of really poorly designed. I think I really obviously it's sort of like a system that keeps building and new principles keep getting added to it.
(04:18):
It's like a renovation that was just going to be a very small house. And then owners keep coming in. The ownership changes every couple of years with the change of government and they just keep adding extensions on and making little renovations and none of it is particularly cohesive or talks to the other principles. And I really feel like that wonky old house is a little bit how our superannuation system has ended up. So yeah, it's pretty challenging for the average person to navigate this. And not only do they have a lot of confusion and misconceptions about how things work, I think people make a lot of mistakes and it's a real time bomb just sitting there ticking away. For many people when you think about it, you get a job and you have to set up a super fund and often they make you sign some kind of death benefit nomination that you don't even appreciate is as important as a will that you may or may not have.
(05:26):
And you just go ahead and you write some names down and that's it, and you never look at it again. And that's your entire superannuation strategy. And for many people, especially when they're a bit younger in the wealth accumulation phase, the assets in the super fund are their biggest asset if they die, we do have compulsory insurance that sits in the fund with our super contributions and super balances. And for a lot of people who are young couples with young children or singles, that actually might be their main asset. I know for me still if I die, I'm worth way more to my family than when I'm alive. Financially speaking, of course, all my assets are in the life insurance policy in super. So the superannuation strategy is actually really critical, but people make it with no information and really not thinking anything about it.
(06:30):
So let's talk a little bit about BDBN just to lay the foundation. And so obviously if you are a experienced estate planning lawyer, you'll know all of this, but I would just want to sort of make sure everyone's on the same playing field. So the first assumption that people make lay laypeople and maybe some lawyers who are an estate planning specialist is that your super benefits and life insurance in your super fund is automatically gifted by your will if you have one or under the intestacy rules if you don't have a will. And that is simply not the case. It's far more complicated than that. You actually, if you want control over where your benefits go, you have to tell the controller of the super fund, which is known as the trustee where you want your benefits to go. So the most common way to do that is with a document called A Binding Death Benefit nomination, and the acronym for that is typically BDBN.
(07:40):
So that's where you've heard BDBN, and it is a death benefit nomination of where your super and life insurance in your super fund should go when you die. Now, you can make a binding nomination, a non-binding nomination. There's also lapsing, non lapsing, there's all different types, but we'll just stick with the original BDBN, which is it tells and forces the hand of the trustee to pay your super and life insurance benefits where you've directed in your nomination. It's kind of like a will for your super. Now, it's only going to be binding on the trustee of the fund if it is valid and effective. So if you've nominated the right people and you've executed it properly because there's specific rules that need to be complied with kind of lack of will. So the BDBN is really important and it can come in all kinds of forms.
(08:43):
There's different rules about it depending on whether you've got a retail or public offer fund or a self-managed super fund. And yeah, if you start a job and you set up a super fund account, it's probably going to be there in the paperwork that you sign. So one of the things is there's rules about who is allowed to be named in the BDBN. And sometimes you'll see people get really confused about this because they are confusing. So the rules about who you can actually name to receive your super and life insurance in your fund is governed by the Superannuation Industry Supervision Act. The SIS Act is what we call it. So you can't just name anybody. You can only name a current spouse, which includes a defacto spouse, your children, a person who is a financial dependent, a person who is in a interdependent relationship with you, the member or your legal personal representative.
(09:52):
What the hell does legal personal representative mean to a lay person in the SIS Act? And the general legislation, it's referring to the executor of your estate or the administrator of your estate. So what that means is if you nominate your legal personal representative, then the super benefits go to your executor or administrator and they can then be distributed with the rest of your assets in accordance with your will and any directions you leave in your will. So there's a few moving parts there. Firstly, you have to actually use the words legal personal representative if you want it to go to the executor for distribution under your will. There's quite a famous case where a solicitor, a lawyer actually got this wrong and named their executor and they said a hundred percent of my benefits to my executor in the BDBN. And that was disputed as being an ineffective and invalid BDBN because they needed to use the words that are in the SIS Act, which is your legal personal representative.
(11:02):
And what do you know? The BDBN was held to be ineffective and there was no nomination binding on the Superfund. So you have to use the words your legal personal representative, and this really grinds my gears because you'll often see nomination forms. I'm pretty sure my own nomination form for one of my super funds at one point said executor instead of your legal personal representative. And it's like if there's a public offer form mandated by that fund, that entire institution, and they're using the wrong wording, what are you meant to do? And they're misguiding members. So that just really grinds my gears, but if we just sort of stick to the legal principles instead of me turning this into a rant. So yeah, you can basically name spouse, children, financial dependent, interdependent relationship people or your legal personal representative, IE the executor of your estate, people who aren't allowed to be named in the BDBN, siblings, parents, grandchildren, grandparents, friends.
(12:18):
It's really quite restrictive. I saw a post by the ABC a little while back. It was like a social media post where they were talking about this rule and the comments section was just blowing up because everybody was up in arms about how unfair it is. I don't have a spouse, I don't have children. The government forces me to put my money into super and now I can't even send it to the people that I want to. And those kind of comments, I completely appreciate the sentiment, but they're not legally correct because you can actually have siblings or parents or grandchildren receive the super and life insurance ultimately, but you need to do it as a process instead of a one step process. So if you want it to go to a spouse or children, you can do a one step process, you make your BDBN and you just name them directly to receive the super benefits.
(13:21):
If you want it to go to somebody who is not a SIS act dependent, then what you have to do is actually give it to name your legal personal representative. So you would say a hundred percent of benefits, go to my legal personal representative, and then you need to make a will. And in the will, that's where you say either a specific gift of the super and life insurance to the ultimate recipients, siblings, parents, friends, grandchildren, grandparents, charity, et cetera, or you just let it go with the rest and residue of your will to whoever you've named. So you don't have to specifically deal with it, it can just form part of the assets distributed by your will to however you've structured your will. So you can get there, but you need to do this two-step process. And obviously the more steps, the more complicated.
(14:14):
If you've set all that up but you haven't named your legal personal representative, you've named executor, and then there's a challenge and the BDBN is held to be ineffective, then you are in a situation where you've made no nomination. So if you don't have a BDBN in place, then the trustee of your super fund decides where it goes. And of course they can only pay it to those death benefit dependents in the SIS Act, spouse, children, financial dependent, interdependent relationship or a legal personal representative end. And they will obviously take submissions from the interested parties if you've got an executor or administrator, if there's family members who they can consult and decide where they think it should go. So based on need, also based, likely based on what is less likely for them to be sued for breaching their trustee duties. So if you want total certainty and you are a member of a superfund where you are one of thousands or tens of thousands of members and you don't know your Superfund trustee from a bar of soap, then a binding death benefit nomination is one way to get control and certainty about where your super benefits will end up.
(15:41):
So when people's say, oh, it's so unfair, I can't give my super to my siblings or my parents, especially when you think about people who are not in long-term relationships, don't have children yet those 20 year olds who are working but don't have those relationships established yet they really only have one option. They have to make it to their legal personal representative. And how many of those people have wills? I can imagine that there is just such a ticking time bomb out there of people who have just without giving it a second thought, written down their parents or their siblings in their binding nomination thinking they've sorted it, when in effect they've got an invalid binding nomination. So as estate planning lawyers, thank goodness we're here to sort this out. If you're doing someone's estate plan, you always need to look at their super nominations and review whether they're effective and whether it aligns with the superannuation strategy. And that is just a huge value add that you can bring to the process. I'm talking about you online will providers who don't do that. So as estate planning lawyers, that's something that we can really help clients to get sorted out beyond the basic, I just need a will. How hard can it be? I'm just going to take a little break. I would love for you to listen to one of our members, Louise Moulton, about how The Art of Estate Planning precedents and solutions are supporting her firm.
Louise (17:20):
Hi, I'm Louise from Louise Moulton Legal. When it came time for me to make the big decision to go out in my own sole practise as a Wills estates lawyer, I had no hesitation in taking advantage of my wonderful art of estate planning group and purchasing Tara's amazing precedents. And I have done the training and it makes me the estate lawyer that I am today and I might be a sole practitioner, but I know that I've got the whole network across Australia standing behind me as if we are one great big office together and I can work with them to create the best outcomes for my clients and giving them that peace of mind that we know a good estate plan can give. So out of estate planning, love it. We'll always be with you, bring it on.
Tara (18:10):
So you getting the message that the BDBN has to nominate someone who is a SIS act dependent, but what is the difference between naming the beneficiary directly and having the super go straight from the super fund to them through the BDBN or through the legal personal representative and the will? There's actually quite a few distinctions about why you might choose one option over the other. Let's talk about naming a beneficiary directly in a BDBN. Firstly, it's really simple. You may not actually even need a will if you don't have any other assets. The BDBN is almost like the will for your super. It can also be a bit faster because the trustees process can be way faster than an executor or administrator administering an estate. So the trustees basically working out, have we got a valid BDBN, are we comfortable it's been executed properly, that we have the correct beneficiary nominated and they do their sort of due diligence and then they can pay it out.
(19:24):
So that can go way faster than the entire estate administration process where the funds really can't be distributed substantially until everything is wrapped up. Also, if you are in a state other than New South Wales where we don't have, or sorry, if you're in a state that doesn't have the notional estate rules so everywhere except for New South Wales, the super benefits going directly to a beneficiary will mean that they are excluded from the challengable pool of assets if there's a family provision application. So if you want to make sure that the super and life insurance ends up in the hands of your ultimate beneficiary and you're concerned your estate might be challenged, naming that beneficiary directly in the BDBN is one way of just keeping it out of the challengable pool. There's obviously a lot to consider there, and this is not legal advice, but it is one factor to think about in terms of your strategy if that is something you're giving advice on.
(20:28):
There's also options where you are nominating the beneficiary directly. You can do that and it can be the trustee of the fund can set it up to go out as a pension where the beneficiary is a spouse or a minor child and that can leave some opportunities for the funds to stay in a Superfund environment for a bit further versus typically if it's going to come out as a lump sum or to your legal personal representative, it comes out as a lump sum and loses that concessional tax treatment in the superannuation environment. So the main pro is as simple. The disadvantages is firstly, many public offer industry funds do not allow for any kind of contingency planning. If your nominated beneficiary predeceases you, then you have to go back and make a new BDBN, which can be hard, especially if it's spouses and then children and maybe the member or test data has become old, they've dominated their spouse 15 years later, the spouse has died, that member might've lost capacity or is ageing and you just haven't had the ability to plan for the different contingencies also where you are distributing the super directly to a beneficiary that then just becomes their asset and there's no asset protection opportunities for them.
(21:58):
There's no income tax planning opportunities versus if they had received those funds through a testamentary trust. And a couple of other things that can be really frustrating, I guess, or just kind of a bizarre outcome is the financial element. So I guess I should have said this at the beginning, but when you are working with a client to help sort out their super strategy, it's so important to collaborate with a financial advisor if they have one because there's obviously a lot of tax consequences for the family and also for the beneficiaries. So we won't really get into the tax treatment. That's probably another can of worms about do we have death tax in Australia and superannuation being paid to adult children potentially being a bit of a death tax. But some other factors just to think about is, alright, if you have got, I might just use myself as a scenario.
(23:04):
So if my parents passed away and left their super to me directly, if I receive it in my own name straight from the super fund, it's actually going to be counted as my income in that financial year for Centrelink purposes and division 293 tax purposes. So you might think, oh, well, who's receiving Centrelink? But I do receive the childcare subsidy for my two little boys who in childcare and go to afterschool care. And that childcare subsidy is really helpful. Obviously they have stepped income thresholds based on what percentage of subsidy you can get and eventually you are ineligible if you earn too much. So if I receive the super straight to me, I might actually lose my childcare subsidy for that year and have to pay it. Now if you're really interested in that, we actually covered that in one of our very first episodes, episode number three.
(24:10):
So you can go and hear us have the whinge and the discussable about that. Division 293 is also another one. If you are a high income earner, I think if you earn more than $250,000 in a particular year, you pay an additional tax and they'll treat the lump sum of super that you've received from the death of a loved one as income tax that could be taxed versus and spoiler. But if you receive that amount through the estate after it being paid to the legal personal representative, those considerations don't apply. Division 293 doesn't apply and it doesn't impact on your Centrelink income threshold. Also, there's a 2% Medicare levy that's payable as well. So if you are a non-tax dependent, so okay, we'll talk about this. I was wondering if I could get away without talking about it because it's a whole can of worms, but there's two rules, right?
(25:12):
There's a set of rules called who is a death benefit dependent for SIS ACT purposes, and those are the people who are able to receive the super straight from the super fund in a BDBN. There's also another concept which is who is a death benefit dependent for tax purposes. And that is if you receive the super, whether it's through the estate or from the super fund, some people will pay no tax on receiving it and others will. And it's similar but different to the SIS act dependent. So the tax death benefit dependent includes a current spouse including de defacto spouse, also a former spouse, children under 18, children between 18 and 25 who are financially dependent on you, a person who is a financial dependent and a person who's an interdependent relationship with you. So the big difference is children. So any child regardless of their age can be named in the BDBN to receive the super, but only the children who are under 18 or under 25 and dependent on you can receive it.
(26:30):
So I am much older than 25. Let's just say that if I received the super directly from my parents or through their estate, I am going to have to pay tax on the taxable component, not necessarily the full amount, but the taxable component. And yeah, I'll have to pay tax on it, whereas a spouse will always receive the super tax rate. So if I had received the BDBN, sorry, if I'd been named in the BDBN and received the super directly, then I do have to pay tax because I'm not a death benefit dependent for tax purposes because I'm too old and there'll be the 2% Medicare levy on top of that, whereas if it's paid to me or if I get it through the legal personal representative and the distribution under the will, the 2% levy doesn't apply, which is pretty strange. Oh, it's not strange.
(27:31):
So obviously there's reasons for it, but it is an outcome that I think people overlook and don't necessarily build into their planning. So if that's important to minimise, then you need to be strategic about are we going to pay it through the legal personal representative instead? So let's talk about the pros of nominating the legal personal representative to receive the super and then distributing it under the will. So the pros are you can plan for multiple contingencies. So we can draught in the will like we would draught for any other gift, plan A, plan B, plan C. We're really limited by our own creativity and can do whatever we'd like. So that can be really helpful to set in stone a plan with greater certainty and flexibility. As I spoke about, if you receive the super and life insurance ultimately through the distribution under the will, then you don't have to worry about your Centrelink income being over the thresholds.
(28:39):
You don't have to worry about the division 293 tax or the 2% Medicare levy. And probably my biggest advantage of paying it through the legal personal representative to the will is that we can then actually put those funds into a testamentary discretionary trust and that will then allow you to receive the asset protection for bankruptcy, increased asset protection for family law breakdowns and the ongoing tax concession and tax-free income abilities to minors. Now, there's a big asterisk there that you may need to use a super proceeds testamentary trust in some instances where you've got a surviving spouse and minor children. So you always need to make sure that your will includes the ability for that where you're setting up a testamentary trust. But if you use a BDBN directly to those beneficiaries, you don't get any of those testamentary trust protections. So that is one reason why you would pay it to the legal personal representative because your strategy includes a testamentary trust.
(29:54):
The downsides of paying it to the legal personal representative and putting it through the estate is super is there for going to be part of a challengable pool of assets available to satisfy a family provision application or challenge. So if you are on notice that that is a real risk for the estate plan, then you may need to think strategically about whether you actually want to direct the super and life insurance into the will to be in that challengable pool. There can also be a timing differential, right? Because as I said earlier, you really have to wait for the entire estate to be administered and finalised before the beneficiaries get their final distribution. Sometimes some strategies I've seen is where you are, for instance, using a testamentary trust, and that's a big part of the estate planning strategy and you want the super and life insurance to go in there.
(30:53):
You can do a hybrid BDBN where you might nominate a fixed sum like $30,000, not insignificant, but not the bulk of the death benefit. And you nominate that towards say, the surviving spouse. And then the balance goes to the legal personal representative. And that is sort of you're trying to get the best of both worlds to free up some cash for your surviving spouse so that in theory they should receive that 30,000 from the fund quicker than the estate is administered and have a bit of cash available, especially if there's not likely to be much cash in joint bank accounts. And if one spouse dies, cashflow is going to be a concern for the surviving spouse. That can be one way to sort of get a little bit of cash in their hands faster, but still get the bulk of the life insurance and super into the testamentary trust protected environment.
(31:57):
Obviously if you're paying the super to the legal personal representative, the will becomes really critical. So the will starts to do a lot more heavy lifting. Obviously they should have a will anyway, so it's probably not a big deal. But for instance, there's lots of people who don't do a comprehensive estate planning exercise and they just nominate a BDBN and name their spouse, and at least they've got some kind of strategy in place. So what I find is generally for the bulk of the matters that I do, we would always be looking at testamentary trusts anyway. So if you're doing a testamentary trust will then you nearly always need a BDBN to the legal personal representative. So the testamentary trust can protect that inheritance and they go hand in hand. Versus someone who is not really doing a sophisticated estate plan or bothered to do a will at all, then they are more likely to have a BDBN that just names a beneficiary directly.
(33:00):
So there's a lot at play here. We haven't even mentioned reversionary pensions, we haven't mentioned blended families. We haven't really talked about self-managed super funds, but as you can see, there's a lot to consider here. So I think the main takeaways are collaborate with a financial advisor, be strategic. It is more complicated than you think, but there's nearly always a pathway. And yeah, I guess I like to think of are we doing a single step process where we're just naming a beneficiary directly? And if so, we need to be really dialled into whether they are actually a valid SIS act dependent and who can be named, or do we need that two-step process where the BDBN is almost acting like a bridge between the super fund and the will so that we can get the benefits into the estate and then distributed according to the will.
(33:57):
So I hope this has been useful. My next episode, I dunno if it's coming up right away, but I'm going to record another episode which will come up soon about do you need a BDBN, are they overrated? Because remember, if you don't have a BDBN, the trustee still will make sure that the benefits go somewhere. So are BDBNs essential or are they actually overrated and people push them too much. So I hope this episode has been a great foundation to prepare you for that discussion. Thank you so much for tuning in and I'll see you next time.
