Over the past few months there has been increased interest in the area of binding death benefit nominations. In most cases, trustees’ interest in this topic has been stirred by requests from advisers, who are keen to form closer ties with key clients.
This article explores some of the practical issues that trustees will need to consider before amending trust deeds to provide for binding death benefit nominations.
SIS requirements
As most readers will know, the ability of a trustee to provide a binding death benefit nomination is based on the provisions of section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Under this section, the governing rules of a superannuation fund may allow a member to direct the trustee on who may receive benefits in the event of his or her death. The person(s) nominated by this direction must be the legal personal representative and/or a dependant(s) of the member.
Further details on the form of the nomination, and the disclosure obligations of the trustee, are contained in SIS Regulation 6.17A. This regulation imposes a number of procedural requirements on the trustee in order to effect a valid nomination.
Although many trustees may focus on the obligations contained in the SIS Act and regulations, it is also important to note that any proposed amendment to the governing rules of the fund must be consistent with the existing governing rules, and must not disadvantage the rights and entitlements of fund members and/or their beneficiaries.
Amendments to the governing rules
Although drafting the required amendment may appear to be relatively straightforward, trustees must also bear in mind whether they have created appropriate powers to resolve situations where:
n the nomination ceases to have effect;
n one or more of the nominated dependants dies before the member; and
n if a dependant or dependants do die before the member, whether the interest of that member can be appropriately and equitably reallocated.
The amendment should also contemplate situations in which a member may make a subsequent or revised nomination. Trustees may also wish to consider whether confirmation in writing should be a pre-condition for a valid nomination.
Administrative and compliance issues
Given that the provisions of regulation 6.17A(4) are an operating standard, an ongoing compliance review should be conducted of the administration processes that support the binding nominations. The following is a summary of some of the areas that trustees should review.
A disclosure statement or document will need to be prepared to provide sufficient information to interested members. As a guide it should cover:
(a) who can be nominated;
(b) the requirements to effect the nomination form;
(c) the term of nomination;
(d) the default provisions where the nomination expires or is invalid;
(e) the effect on benefit allocations where a nominated dependant dies before the member;
(f) the fact that 100 per cent of the benefit must be allocated; and
(g) the requirement for updating.
As part of this disclosure, the trustee should create a standard nomination form, which can include acknowledgments from the member of the above.
As nominations are received, a review is required to ensure:
(a) the member and two witnesses have signed the nomination form;
(b) the form is properly dated;
(c) each witness is 18 years or older; and
(d) each witness is not mentioned in the nomination.
The nomination form must be accompanied by a declaration that the nomination has been executed in the presence of the witnesses.
In order to comply with timing restrictions, trustees may wish to create a systems ‘flag’ to track the date of the nomination (or subsequent confirmation) and ensure that the member is aware when the expiry date is approaching. Administration systems will also need to be updated in the event that the trustee is notified that an intended beneficiary has died.
Given the need to ensure that the procedural elements of the nomination are properly administered, trustees may wish to consider establishing a dedicated team of trained staff to handle enquiries and to process nominations.
— Scott Charaneka is a partner at Ebsworth & Ebsworth Lawyers. E-mail: scharaneka@ebsworth.com.au
