SMSF death benefit nominations: binding, non-binding and reversionary pensions explained

Super does not automatically form part of your estate. When an SMSF member dies, the balance is paid out under the fund's own rules — the trust deed, the death benefit nomination, and the trustees' discretion. Getting the nomination right is the single most important estate-planning decision an SMSF member makes, and it is also the area we see the most expensive mistakes.

Who can receive an SMSF death benefit?

Under the SIS Act, a death benefit can only be paid to a 'SIS dependant' or to the legal personal representative (LPR) of the estate. SIS dependants are: the member's spouse (including de facto), children of any age, anyone in an interdependency relationship, and anyone financially dependent on the member at the date of death. Friends, siblings, parents and adult children who are not financially dependent cannot receive the benefit directly — only via the LPR.

Binding vs non-binding nominations

A non-binding nomination is a wish; trustees can override it. A binding nomination, if validly made, must be followed. To be valid under the SIS Regulations a binding nomination must be in writing, signed and dated by the member in the presence of two adult witnesses who are not nominated beneficiaries, and renewed every three years — unless the trust deed allows a non-lapsing binding nomination, which most modern SMSF deeds do.

Non-lapsing binding nominations — the SMSF advantage

Retail and industry funds usually require a fresh nomination every three years. A properly drafted SMSF deed can permit a non-lapsing binding nomination that remains in force until revoked. This is one of the underrated benefits of an SMSF — but it only works if the deed expressly authorises it and the nomination is executed exactly as the deed prescribes. Check your deed; a 1990s template may not allow it.

Reversionary pensions

If the member is already drawing a pension, the cleanest succession is a reversionary pension nomination. On the member's death the pension automatically continues to the nominated reversionary beneficiary (typically the spouse) without needing to be commuted and restarted. The reversionary beneficiary has 12 months before the deceased's transfer balance account credit is added to theirs — useful breathing room for transfer-balance-cap planning.

Tax treatment for adult children

This is where most mistakes happen. A death benefit paid to a tax-dependant (spouse, minor child, financial dependant) is tax-free. A benefit paid to a non-tax-dependant (almost all adult children) attracts tax of 15% plus Medicare on the taxable component, and up to 30% plus Medicare on any untaxed element. On a $600,000 benefit with a typical taxable component, that is roughly $100,000+ of tax that planning could have reduced or avoided.

Re-contribution strategies

Members over preservation age who have met a condition of release can withdraw taxable component and re-contribute it as non-concessional, converting taxable to tax-free component. Done over a few years within the contribution caps, this can dramatically cut the tax payable on a benefit ultimately destined for adult children. The strategy is legal and ATO-acknowledged but must respect the contribution caps and the work test where it applies.

What can go wrong

• Binding nomination not witnessed correctly — reverts to trustee discretion
• Lapsing nomination not renewed within three years (in funds that require it)
• Reversionary nomination missing from the pension documentation
• Nominating a beneficiary who is not a SIS dependant or LPR — invalid
• Death of the surviving trustee leaves the fund without anyone able to pay the benefit; corporate trustee structures avoid this
• No backup nomination for the case where the primary beneficiary predeceases the member

Practical checklist for SMSF members

Review your nomination every two years and after any major life event (marriage, divorce, birth, death). Confirm the trust deed allows the type of nomination you have made. If you are in pension phase, make sure each pension has a reversionary beneficiary nominated at commencement — adding one later requires commuting and restarting the pension. And consider a corporate trustee: in a two-member fund where one dies, a corporate trustee continues seamlessly, while individual trustees must restructure within six months.

Sources: Superannuation Industry (Supervision) Act 1993, section 10 (definition of dependant); Superannuation Industry (Supervision) Regulations 1994, regulation 6.17A; Income Tax Assessment Act 1997, sections 302-60 to 302-145; ATO — Paying superannuation death benefits (ato.gov.au).