Tara (00:51):
Thanks for jumping back into the Art of Estate Planning podcast. I'm so thrilled to be joining you. And today's episode is actually a bit of a follow on from episode 41. So if you haven't listened to episode 41, I actually recommend that you turn this off, jump up and scroll up and go look at episode 41 and listen to that one and then come back and listen to this because that episode lays the whole foundation on BDBNs what that even means. And this will make a whole lot more sense once you've listened to that episode. Now, if you are already a pro at super and succession planning and BDBNs, you're probably cool with this episode, but I just wanted to let everybody know that this is really a follow on. So there's a bit of a school of thought out there or a debate about do you really need a BDBN?
(01:55):
I think the starting point is that every estate plan should have a BDBN either nominating a beneficiary directly or to the legal personal representative for distribution under the will, but do you actually need a BDBN on every single matter? And that's what I want to talk about today. So I guess spoiler alert, it depends, oh my God, hilarious. Every lawyer ever says it depends, but I think we can build a bit of a framework or some parameters around when to BDBN and when not to BDBN. So let's start with the two main types of super funds that your clients will come to you with. So they will probably have either what I call a public offer or retail fund, which is where they are one of tens of thousands of members in the fund and they don't have any connection personally the trustee of the fund. They don't know them from a bar of soap and they're just one of many.
(03:04):
So that's one category. The other category is the self-managed super fund. So that's obviously a closely held fund where they or their legal personal representative are a controller of the fund. There's limit to the members. You can't have more than six members of a self-managed super fund and they basically are in control of it or their loved ones are. So I personally think our strategies for a public offer fund versus a self-managed super fund should really change depending on the type of fund that they have. So my general position is when it comes to a public offer fund, a BDBN is critical. Nearly 99% of the time the BDBN will be very valuable to implementing an effective estate planning strategy and getting certainty. And that's because we don't want to be at the mercy of this professional third party trustee who doesn't know anything about us.
(04:09):
So having the BDBN in place therefore allows you to develop a strategy plan for that strategy and get certainty in place. So let's start there in terms of the advantages. So if you make a BDBN where you've got your public offer fund, it gives you certainty. You know that you have directed the trustee of the fund where to pay it. The administration bureaucracy is streamlined because you don't need the trustee making inquiries trying to make a decision about where your benefits should go, that reduces their risk in terms of the exercise of their discretion, so much clearer, simpler, less risky, and it then allows you to take effective strategies in terms of are we trying to prevent a family provision application and having the super available to satisfy that application? Have we got specific assets coined the specific beneficiaries as part of our succession strategy or if there's a blended family?
(05:18):
So the BDBN just gives you a lot more certainty there. I really think in a public offer fund, it's just not worth relying on this third party arms length professional trustee. They don't know your circumstances, they don't know you from a bar of soap. You do obviously have to think about and collaborate with a financial advisor if the client has one, especially on things like if there's reversionary pensions in place, but generally speaking, the BDBN will be needed. It's just a matter of how do we structure that BDBN and I talked about some of the options in episode 41. Let's talk about the self-managed super fund now. So having discretion lie with the trustee of that fund in the absence of a BDBN is a really different proposition than with the public offer fund because the control of that fund. So the trustee, whether it's the individual trustees or the directors and shareholders of a corporate trustee, they actually have to be people who are close to you under the SIS rules.
(06:35):
It has to be like your legal personal representative or a coem of the fund. I'm not going to go into those exact rules, but they'll nearly always be somebody that you know and are closely related to. So that is a totally different proposition. In a very straightforward simple case, if you've got a couple, then they will both be members of the fund. They'll usually both be directors and shareholders of the corporate trustee or individual trustees. And when one of those members dies, the surviving spouse will most likely be the controller of the self-managed super fund. So if you have a situation where the member who dies wants their benefits to go to the surviving spouse and the surviving spouse is the controller of the super fund, the stakes aren't as high or we don't really care so much about the fact that there's no BDBN.
(07:38):
So I guess what I would typically say is I'm actually a fan of not having a BDBN for a self-managed super fund where it's appropriate for the trustee to have discretion. So where we have the right people who are in alignment with the intended beneficiaries of the super benefits and are probably going to be the executors of the estate, if those people are all the same person as the controller and then the ultimate controller of the trustee of the self-managed super fund, then maybe we don't actually need a BDBN. It's okay to have trustee flexibility. And the reason I say that is because that trustee discretion adds a huge amount of flexibility to their plan to adapt to changes in circumstances, changes in the tax of super. I'm recording this in June, 2025 and at the moment in the media there is just so much reporting of the $3 million division 2 96 tax and the tax on unrealized gains and we've got our member contribution balance limits on pensions and our superannuation guarantee percentage, mandatory percentage is increasing.
(09:12):
There's just so much going on in the tax and legislative space and policy space around super at the moment. Maybe that will die down and we'll have a little bit of the status quo for a while, but at the time I'm recording this, it just, every government keeps tinkering with the super and it keeps changing. And so that's a really tricky landscape to plan for, especially when we are trying to achieve something from an estate planning perspective in terms of getting the right money to the right people and we are trying to navigate the parameters of the SIS legislation and the case law. Then we've got the lump sum tax consequences. We've got the structures that the members might have put in place to manage or either mitigate or take advantage of the tax environment while they're alive in terms of reversionary pensions and all of that.
(10:14):
And then we've got, okay, what are the consequences of receiving the super in the hands of the beneficiary in terms of division 293 tax in terms of the Medicare levy, Centrelink, childcare subsidies, et cetera. There's a lot going on. So in one respect, if you can actually empower the recipients of the super who are in control of their fund to sit down with their financial advisor and get advice on the best possible strategy balancing all of those factors at the time of the distribution, that can be really powerful because we just can't plan for all of that at the moment. So it really just allows the families advisory team to evaluate the changes in the law and the law at the relevant date taxation consequences, social security needs and the family needs at that particular time. Not to mention, we haven't really even talked about illiquid assets like real property in the fund and the consequences of that, but I just think where we have got a vanilla scenario where we're not likely to have any dispute, I actually think having no BDBN can be a really good plan and I would sort of explain it to clients like we are proactively choosing not to have a BDBN, we don't have no BDBN because we've overlooked it and we are ill formed or lazy.
(11:55):
We've chosen it deliberately. So it's the proactive no plan, obviously the downsides of doing that, I think it gets very risky where you have a blended family and there's dispute about the executors of the estate, there's uncertainty about who will actually take over control of the super fund, things like that. I don't think it's recommended where you have less of a closely held self-managed super fund. So if you've got all six members there rather than just a surviving spouse or an adult child who you want to inherit the super, I think that obviously gets very risky. You do have less certainty. So we are trading certainty for flexibility and you also do just need to be careful or strategic in your will because for instance, there's been some cases where there's a conflict between the duties of the executor of the estate and the trustee of the fund.
(12:59):
So if there is a surviving spouse who is the executor of the estate, they're going to be the controller of the self-managed super fund and they want to actually elect to distribute the super to themselves outside of the estate, well that's potentially in breach of their duties as the executor of the estate because their duty as executor is to maximise the estate and if they choose to actually pay the benefits outside of the estate, then they're in breach of their duties. So I like to include in the art of estate planning will precedents clauses, just letting them know that if there is a conflict between those duties, they are allowed to act not withstanding the conflict and won't be held in breach. So you do have to think kind of strategically about that, but the advantage of giving the trustee flexibility, it really overcomes some of the downsides of BDBNs.
(14:02):
So the BDBN can be difficult where you have a BDBN in place, everybody thought they were doing the right thing and it was the best strategy at the time, but there has been a change in the rules and the taxation laws or whatever the pension rules and that BDBN is no longer appropriate or doesn't achieve the best strategy, but our members lost capacity. There's actually a lot of uncertainty in the law at the moment about whether an attorney under a financial power of attorney can change, make renewal or revoke a BDBN, and it actually differs state to state. So there's inconsistent case law in different states about whether a BDBN is classified as a testamentary instrument. So as the summary, I'm not going to go into all the cases, but you're probably familiar that an attorney under a financial power of attorney cannot make someone's will for them.
(15:11):
So testamentary instruments can't be delegated to an attorney, right? So if a BDBN is a testamentary instrument and considered to be like a will, then the attorney can't change it or make one. Some states say that a BDBN is a testamentary instrument, in which case the attorneys can't act on the BDBN and other state. It is not. It's more of like a contract and in those states, the attorney can change or revoke or renew or make a new BDBN. So yeah, it's a bit uncertain. So that can be one of the downsides. If you didn't need the certainty of a BDBN and you make one and then you realise that this plan in the BDBN isn't appropriate, you can be stuck with it. Other BDBNs don't allow for contingency plans, especially like public offer ones, you just kind of get stuck with. You can only nominate one beneficiary or a T or one set of beneficiaries.
(16:20):
So you can nominate more than one, but only in one eventuality, and then if any one of them predeceased, you can't nominate that their entitlement goes to someone else. There's a big difference actually between what we can do with BDBNs with our public offer funds and our self-managed super funds. So there was a case recently called, well I refer to it as Hill and Zda, it's got a longer name, but if you search that, you'll find all the details of it, which basically held that the rules in the SIS Act and regulations prescribing how the form and the execution requirements of a BDBN need to be satisfied in order to be valid. Those rules actually don't apply to self-managed super funds. So what we're sort of stuck with is for self-managed super funds, you just have to follow the prescription in the fund deed about what makes a valid BDBN.
(17:26):
Now, most of them will still follow the guidelines in the SIS regulations because for many, many years everyone assumed or the conservative position was that those rules did apply to self-managed superfund, but you actually don't need to. So we can update our Superfund deeds for self-managed super funds and bring in a lot more flexibility about what we're doing with our nominations so we don't have to renew our nominations every three years. We can plan for multiple contingencies. We can say what takes priority over a reversionary pension or a BDBN. So the self-managed superfund just allows so much more flexibility. You can even hardwire the BDBN into the terms of the self-managed superfund deed to try to reduce uncertainty about it not being effective or binding on the trustee. Whereas with public offer funds, you sort of have to follow the form that the fund gives you.
(18:37):
They have to be renewed every three years, otherwise they lapse and you're kind of stuck. You don't have contingency plans, you're stuck with the prescription of the fund in terms of reversionary pensions and the BDBN about what takes priority as well. So I just want to mention if this is going, you're starting to feel overwhelmed if you have a client with a self-managed super fund and you think, how am I going to do a BDBN? There's so many moving parts. We actually have a precedent pack for self-managed superfund, BDBNs and we've really tried to take all the guesswork out of it for you and make it, I don't want to say idiot proof, but couple of on those days when you didn't have a good sleep and you need a couple of coffees, it should still set everything out so you don't make a mistake and you know what you're doing.
(19:31):
And for instance, in that precedent, what we have is five different strategies available on how you might set up your BDBN. So for instance, one option is where we are going straight to the nominating the legal personal representative. A second option is where we actually want to nominate our beneficiaries directly, whether we're doing percentage splits or lump sum fixed amounts, we then are factoring in spouses. So for instance, I almost like this hybrid strategy between making a BDBN where both our couple members have died, but no BDBN and leaving it with trustee flexibility if only one of our member of a couple have died. And if you're going to do that, I feel like it's a really nice balance between the flexibility of no BDBN, but then also a BDBN for when both our couple have died and we are distributing it to minor children or adult children, especially if you're using testamentary trusts in the will.
(20:44):
So our BDBN has an option for you to draught that tells you exactly how to do it, and we basically say if my spouse has survived, I make no BDBN discretion lies with the trustee to decide how to allocate the benefits. But if they have failed to survive me on the death of the last of us, then it's going straight to these people or straight to the legal personal representative so that it can go into the testamentary trust. So for a self-managed super fund, that's actually probably the most commonly utilised BDBN strategy that I would recommend. So it's a little bit cheeky because it's like no BDBN is needed, but we do it through a BDBN strategy and we're planning for different contingencies. So our precedent pack lays it all out for you about how to do it. The drafting is all there. It has letters to the clients explaining how it all works.
(21:48):
It has a letter to the financial advisor explaining what you are recommending from a legal perspective and getting their input on how to do it. And it also has flyers for clients explaining what is a BDBN, what are some of the decisions that they have to make in terms of their super and how does it work with their will? How does it work with their testamentary trust? What is a super proceeds trust? You can put your branding on all of those flyers and as well those will accompany the letters to the clients with the advice and the recommendation. So we've really tried to set everything out super clearly for you so that you can implement these advanced BDBN strategies for your self-managed super funds. That precedent pack for BDBNs for self-managed super funds also comes with a really detailed training by yours truly, which goes into this in a lot more detail.
(22:51):
So you can be armed with the paperwork that has all of the user nodes and guidelines on how to draught it. You've got the knowledge from the training and then you've also got the client facing resources to really help with the communication piece to try to just make sorting this out for clients as straightforward and simple as possible. Now I'm going to take a little sip of my cup of tea and I would like to leave you with a message from one of our beautiful members, Jodie Chapman, about how she finds the art of estate planning precedents adding so much value to her law firm.
Jodie (23:36):
Hi, I'm Jodie and I'm an estate planning lawyer. I'm a sole practitioner and my firm is Cy Legal. Before I started using the out of estate planning testamentary Trust will precedents, I was using precedents that were randomly updated. There were aspects of the old precedents that were tricky to explain to clients. Now that I use the Art of Estate planning will precedents, I can confidently explain the benefits of a testamentary trust will to clients and I am more time to spend on other aspects of my business.
Tara (24:07):
So I want to just round out this episode and to say, of course, we know firstly the importance of a BDBN if we want to deal with super under the will, the BDBN is the starting point as our bridge to connect the super fund to the will, and we know that if you don't have the super assets coming into your will in the hands of the legal personal representative to be distributed according to the terms of the will, that any gift or direction that we leave in the will is irrelevant and ineffective. Now obviously if the super does come into the will to be distributed, sorry, come into the estate to be distributed under the will, then those clauses and directions have a lot more power, but our BDBN is the link or the bridge. I think the starting point in terms of our question of are BDBNs overrated?
(25:15):
I think the starting point is that a BDBN is a very powerful and necessary tool in our estate planning toolkit. I would always start, I think with the assumption that we should have a valid and effective BDBN and then I think we can say there's some exceptions to that rule where not having a BDBN can be a really helpful strategy. So I guess if you hear a broad brush statement where they're like, you always need a BDBN in that situation, I think it's fair to say BDBNs are overrated. Some nuance needs to come into the conversation because there are some circumstances where no BDBN proactively strategically choosing not to make a BDBN can be the better outcome. And I think those circumstances would be, and this is not legal advice, this is just a broad brush framework would be if you have a two member self-managed super fund for a couple who are married in a relationship spouses of each other and they do not have a blended family, they have a vanilla family and they have a self-managed super fund, then in that scenario, no BDBN in the first instance can be really powerful.
(26:45):
I still like to have a BDBN in the scenario where they've both died, especially if you have set up testamentary trust in the will because you don't want ill of informed naive adult children executors or independent executors coming along and just paying the super directly to the beneficiaries outside of the will without considering the whole picture. Where you've set up testamentary trusts in the will and you want those beautiful asset protection and tax planning advantages to cover the super and life insurance. We don't want the situation where they're inadvertently just paying it outside of the will directly to beneficiaries and losing the opportunity to get those assets into a testamentary trust. So even then I think a BDBN, I would recommend one, be prepared that is silent in the first instance and gives the surviving spouse discretion and then nominates the legal personal representative after they've both died so that we do have certainty.
(27:55):
I think if you have got a vanilla family in a self-managed super fund and you have got real property or a limited recourse borrowing arrangement, then flexibility is going to be really important and helpful and no domination can be very powerful there. I think if you have a blended family, then a binding nomination will nearly always be the right option. I'm not even going to go into all the strategies there in terms of do you have multiple funds because you want to stream the super different beneficiaries and making sure that your successor controllers are the right people and aligning that with the executives. There's so much to consider there. I can't even go into that in this episode at least. But yeah, and then I would say nearly with every public offer fund, I would go with a BDBN. So I would love to hear your thoughts if you are a financial advisor and obviously the financial advisors are seeing this playing out in terms of what lawyers are recommending to their clients in terms of administering and implementing these post death.
(29:11):
So I'd love to hear your feedback on what you like and don't like or have seen worked well or not worked well. You also look at it through a different lens to us as estate planning lawyers because we are mostly worried about SIS Act compliance and getting the assets to the right people and a lot less worried about the financial tax and even understanding all of that. So I'd love to hear your feedback. You can always post it in the Art of Estate Planning Group or send us an email at hello at the art of estate planning.com au. But I hope this episode has really given you some food for thought. And the reality is we can't hide from super as part of the estate plan, even though it is a very complex element to estate planning. And I know a lot of us feel really intimidated by the SIS Act and the super regime, and it's not something necessarily that we all feel really confident on, especially if we have come from a different background that's less tax focused.
(30:15):
If we're litigators family lawyers, this can be really mind bending stuff. So I've put that in mind when we created the BDBN Precedent pack. It's really designed to make it as straightforward as possible for you. I've done all of the heavy lifting in terms of thinking and really trying to make the strategies as straightforward as possible for you to implement and the advice that you have to give. So don't feel intimidated. There's the training that comes along with it, and if you're in the TT Precedents Club, we can always talk about the strategy as well as applying to help you get confident recommending it or applying it to your clients too. So don't shy away from it because we really do need to deal with this as part of full service estate planning, and the more you do deal with it, the easier it will get. There's really only way to do it, and that is just to start. So thank you so much for listening. As I mentioned, I'd love your feedback and I look forward to seeing you next week.
