Member Dies Without a Valid Binding Death Benefit Nomination
Ravi, a widower, died in February 2025 aged 72. His SMSF has $1.8 million. His binding death benefit nomination, signed in 2018, nominated his two adult children equally. The deed requires nominations to be renewed every three years and to be in writing and signed. The nomination was never renewed. Ravi had a de facto partner, Mei, with whom he had lived for six years, and a dependent son from that relationship aged 14. The children claim the whole benefit under the nomination. Mei claims she was financially dependent on Ravi. The trustee is Ravi's brother, who is also a beneficiary of the estate. The fund has no insurance.
1. Is the 2018 nomination valid, and who are the potential dependants the trustee must consider?
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The nomination is likely invalid because the deed requires renewal every three years and it was signed in 2018, well outside that period. A non-lapsing nomination would not need renewal, but the deed here says otherwise. An invalid nomination leaves the trustee with a discretion, and the trustee must distribute to dependants or the legal personal representative in accordance with the deed and the trust. Potential dependants include the two adult children, who may be financially dependent or in an interdependency relationship; Mei, who may be a spouse or de facto partner and financially dependent; and the 14-year-old son, who is a child of the deceased and a dependant. The trustee must make reasonable inquiries into each person's circumstances, including financial dependency and interdependency, and document the reasons. The brother's own status as an estate beneficiary creates a conflict, and he should consider appointing an independent trustee or obtaining court guidance.
2. How should the trustee deal with the conflict and the tax consequences of paying a pension versus a lump sum?
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The brother has a personal interest in the estate and is also the decision-maker. He should disclose the conflict, take independent advice, and consider resigning in favour of an independent trustee or applying to the court for directions. If he proceeds, he must demonstrate that he acted in good faith and in the members' best interests. On tax, a lump sum paid to a dependant is tax free; paid to a non-dependant it is taxed at 15% plus Medicare. A death benefit pension paid to a dependant is tax free; to a non-dependant, taxable. A pension can also provide ongoing income to a minor child, which may be preferable. The trustee should compare the after-tax outcomes for each beneficiary, consider the 14-year-old's need for ongoing support, and document the reasoning. The fund must also pay the benefit as soon as practicable.