Masterclass SMSF – What Happens when an SMSF member dies who is an ex-spouse with a Binding Death Nomination?

An associate had a situation with a client as follows –

A is married to B.

During the marriage A does a BDN in super to B.

We will assume the BDN is valid.

After the BDN, A and B divorce but A doesn’t change his BDN.

A dies.

Is the trustee obliged to pay the super to B as per the BDN?

The associate said (they are a lawyer) they think there are two ways of looking at this –

At the time the BDN was made – B was a dependent of A and therefore the BDN is valid.  The trustee should pay it that way – subject to any other provision of the governing rules of the fund.

Another view is that as A & B are now divorced- that BDN is invalid as B is no longer a dependent.

According to the ATO site the main info states –

Dependent – may include former or ex-spouse ATO says

A person is a dependant of a deceased member if, at the time of death, that person was:

  • the deceased’s spouse;
  • a child of the deceased – this includes a child less than 18 years old or a child that was financially dependent on the deceased and less than 25 years old or the child has a disability;
  • in an interdependency relationship with the deceased – this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

For income tax purposes, a person is death benefits dependant of a deceased member if, at the time of death, that person was:

  • the deceased’s spouse or former spouse;
  • the deceased person’s child, aged less than 18;
  • any other person whom the deceased had interdependency relationship.

I also wrote about this here

Binding Death Rules –

Super law does not require an SMSF member to have a death benefit nomination to pay out death benefits.

But, if an SMSF does have one, it will need to first follow the rules of the SMSF’s trust deed (the deed must allow them, and not invalidate the SISA Act) and the rules of super law (SISA act).

For more refer to – SMSFD 2008/3: Binding death nominations.

Snippets here from that link –

The governing rules of a fund are invalid to the extent that they are inconsistent with this SISA requirement.

And it seems this Example 1 given fits into the example you gave –

Example 1

28. In 2004 Jen, a member of an SMSF, makes a valid binding death benefit nomination in the form required under the governing rules of the SMSF. The nomination made by Jen requires the SMSF trustee to provide the whole of any benefit payable in the event of her death to Seth to whom she was married at the time. Under the governing rules of the SMSF a member’s binding death benefit nomination remains valid for five years from the date received by the trustee.

29. In 2006, Jen and Seth divorce.

30. Jen remarries in 2008 but dies later that year. At the time of death the nomination made by Jen in 2004 had neither been revoked nor amended.

31. The SMSF trustee is not required to follow the death benefit nomination which Jen made in favour of Seth. While the death benefit nomination was made in accordance with the governing rules of the SMSF, Seth, no longer being Jen’s spouse, had ceased to be a dependant of Jen for the purposes of the SISA and SISR. Therefore, payment of a benefit to the nominated person would contravene the operating standards of the SISA.

32. As such, the payment of Jen’s death benefits becomes subject to the discretion of the SMSF trustee.

33. In this regard, the SMSF trustee must comply with regulation 6.22 of the SISR and not, subject to limited exceptions, cash the death benefits in favour of a person other than the executor of Jen’s deceased estate or any dependants of Jen.

So it seems that the “other view”, that no-longer dependent, not based on the situation at the time the BDBN was written holds.

But even if no-longer a spouse, there may be dependency via agreed support or court order for income tax purposes – see below

But ultimately, the Trust DEED takes precedence as along as it doesn’t contravene the SIS Act and SIS Regulations

So it seems the Trustee will be BOUND to pay the ex-spouse if still dependent, as I read it… see also further down…

If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to  find the right expert to answer your question – it’s FREE also!

No obligation. 0407 361 596, Paul.

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