What exactly is a "binding death benefit nomination"?

Because we love a good acronym in the world of SMSFs, you’ve probably heard of a BDBN or Binding Death Benefit Nomination. But have you ever wondered exactly what it is? Or how it works? Or whether you should have one?

A BDBN is exactly as it sounds – a set of instructions you can provide to the trustee of your superannuation fund that tells them how to deal with your super when you die. And as long as the right paperwork is done, those instructions are legally binding for the trustee – they can’t do anything but follow them. You can stipulate who gets the money and how they get it (as a pension or a lump sum). For a BDBN to be valid, the fund’s trust deed (its legal rule book) must allow for one to be made and say how that can be done. The instructions must also comply with the super laws – for example, only your estate and certain other people (such as spouses, children and people who are financially dependent) can receive a super death benefit when a member dies. There is an even shorter list (generally just a spouse and children under 25) that can receive the benefit as a pension.

Pretty much any superannuation fund with the right trust deed can accommodate a BDBN, not just SMSFs. That said, different rules apply to large funds and SMSFs.

Perhaps most importantly, as long as an SMSF has the correct rules in place in its trust deed, SMSF BDBNs can last forever (it’s often called a “non lapsing binding death benefit nomination”). In contrast, the normal rules for large funds require BDBNs to expire every three years. They can obviously be replaced with exactly the same instructions but the existing document stops being valid. Some large funds get around that by specific rules in their trust deed that say any instructions given on death benefits are binding forever but mostly the three year rule applies.

BDBNs in large funds also have to be witnessed by two people over 18 who aren’t getting the money from the BDBN. This extra requirement doesn’t have to apply for SMSFs (unless the trust deed says so) although bear in mind that getting anything really important witnessed isn’t such a bad idea anyway.

So are they good?

They can be. It certainly makes life simple for the people left behind – they don’t have any decisions to make, and they can be absolutely certain about who should get your super.

But remember that BDBNs are binding. This makes the decisions about what they say incredibly important – much like you would think very carefully about your Will (which covers all your non super assets), you should think very carefully about your BDBN (which is just as powerful when it comes to your super assets). And you should make sure that the decisions you make about who gets your super comply with the law, are exactly what you want and will stand the test of time. If your circumstances change, you must remember to update your BDBN because in an SMSF it might otherwise last forever. There are lots of examples where bad BDBNs completely muck up good super planning.

For example, what if your BDBN says that your super is split between your three children because when you put it in place you were a single parent? But that was 15 years ago. Since then, you’ve remarried and now you would rather your super went to your new spouse with your children inheriting the rest of your estate. That might make perfect sense because a spouse doesn’t pay tax on super inheritances but adult children do. Unless you change your BDBN before you die, your family will be stuck with a bad tax outcome. It could be even worse – what if your Will was drafted on the assumption that your new spouse will get the super while everything else goes to the kids? It might mean your spouse is completely cut out. Wills usually lapse automatically when someone gets married but a BDBN doesn’t. So yours would still be valid.

Even in simpler situations where you don’t have a blended family, instructions that can’t be adjusted at all after you’ve died can be problematic. We’ve covered a few issues in our article here.

But if you don’t have a BDBN, is that like dying without a Will? We’re often told dying without a Will is irresponsible and creates difficulties for your family after you die. Having an SMSF without a BDBN isn’t the same. We’ll cover that in a future article.