In reviewing self-managed superannuation fund (SMSF) documentation for estate planning purposes we occasionally find a conflict between a reversionary pension (RP) - typically to a spouse - and a binding death benefit nomination (BDBN) – usually to the legal personal representative (i.e. the executor of the member’s Will).
This leads naturally to the question of which one would prevail?
What does the law say?
First, it should be noted that there are no guides in the relevant legislation to assist, no provisions in the Superannuation Industry (Supervision) Act or its regulations which give any real assistance in this area. Second, to our knowledge there are no reported cases on point. Accordingly, we must fall back on general principles of trust law (since SMSFs are trusts) and the individual deed (and any BDBN or RP documentation) of the SMSF for answers.
General trust law says that a trustee’s discretionary powers cannot be fettered or limited. Valid and ‘genuine’ BDBNs and RPs form an exception to this rule. This general principle can be overridden by the terms of the individual trust deed.
In many SMSF deeds there are provisions which provide for the trustee’s discretionary powers to be limited to allow a BDBN to operate. Similarly, a trust deed can allow an RP to be set up so that the pension must be paid to the reversioner on the death of the member.
However, many trust deeds pursuant to which RPs are set up include clauses which allow a trustee discretion in determining the pension terms. If this is the case, there can be no binding RP and a valid BDBN would take precedence. The rationale for such a clause might be that a couple who are members of an SMSF separate, though there would appear to be other ways of dealing with this problem (such as one party rolling out of the SMSF).
Contrast this with the case of a valid, ‘genuine’ RP in which the trustee has no discretion in the matter and must pay according to the terms of the document. In this case we believe that such an RP would prevail over a valid BDBN.
We believe that an RP of this kind (which would automatically transfer the pension and its benefits to the reversionary pensioner) would not constitute any part of the deceased member’s death benefits. Effectively, therefore, such an RP would ‘sidestep’ the normal death benefit process and a BDBN would not apply to it. This approach appears to have received qualified support from the Australian Tax Office (refer to minutes of meeting of the National Tax Liaison Group for March 2010 – Superannuation Technical sub-group).
Our view
In summary, our view is that a ‘genuine’ RP (where the trustee has no discretion) will prevail over a valid BDBN, but that a BDBN will take precedence over an RP in which the trust deed gives the trustee discretion in relation to the terms of the RP.
