07 Jun Nomination of beneficiary – getting it right for you
It seems that a lot of people overlook this important part of their life insurance and estate planning. You really want to make sure you get this right and because it is so complex it requires serious consideration.
Nominating your beneficiaries correctly and using the right type of nomination means that you can be assured the right people will get the assets you intended in the event of your death. Sometimes people say to me “What does it matter what happens to my estate, I’ll be dead!” but we shouldn’t be flippant with a lifetime of hard work and our loved one’s feelings.
The reality is though, getting this area of your estate planning wrong can easily result in huge tax burdens on those left behind, in-fighting among relatives, a legal mire and the potential of assets frozen for years because of court proceedings.
Beneficiary nominations are important for both your superannuation and life insurance and the different nominations have different implications. A person that sets out their instructions within a death benefit nomination provides an important blueprint or plan for the payment of their death benefits to their dependents or Legal Estate.
Consideration needs to be given to:
- How much flexibility you want your beneficiaries to have over the decision;
- How much control you want to have over the payment of funds to specific beneficiaries and the form of the benefit (pension or lump sum); and
- The implications for the beneficiations such tax issues, social security impacts, amounts to pay outstanding debts and so on.
Before we go on…
It is very important to review your arrangements and ensure they align with your expectations as to the distribution to your beneficiaries. As such you need to attend to the following items:
- If you have a life insurance policy through us we encourage you to:
- Contact us and check your nomination(s)
- If you wish to update them we will organise it for you
- Seek legal advice from our specialist Estate Planning solicitors, Equity Trustees, who have offices in every major capital city of Australia. They will review your nominations and estate plan in line with current legislation and your exact wishes. They can also organise Wills and other important estate planning facets such as Powers of Attorney. Equity Trustees are fantastic and very affordable as we have been able to negotiate special rates for all our clients, of which you are one! If you want to organise an appointment with them please contact us.
Nominations under Life Insurance
When we say “life insurance” we mean that the policy is owned by a person and there are no other structures involved such as companies, trusts or super funds. In this space there are two types of beneficiary nominations on a life insurance policy and each has a different implication:
- No nomination
- Completed Nomination
This simply means no specific people have been nominated. This can end up being messy and time consuming to unravel. Usually, your life insurance benefit will be paid to your estate and will be distributed according to your Will. If you don’t have a valid Will, your estate will be subject to state based intestacy laws which can seriously disadvantage your intended beneficiaries.
In the event of your death the person(s) nominated will receive the death benefit proceeds. This nomination must be upheld by the insurance provider.
This nomination gives the insured person peace of mind/control over who they want to get their life insurance proceeds.
A nomination is valid indefinitely, until actively changed by the policy owner.
Nominations under Superannuation
There are three types of beneficiary nominations on a superannuation policy:
- No nomination
- Non-binding nomination
- Binding nomination
No specific people have been nominated and then the trustee(s) has full discretion to determine who receives a deceased member’s death benefits.
This can be very messy and take a lot of time to organise as the trustee(s) have to work out what to do and who are eligible beneficiaries. Often the benefits are paid to estate but if there are any issues with the Will benefits may be withheld until the trustee(s) are satisfied they have contacted all potential beneficiaries.
The member provides the trustee(s) with a nomination as to how some or all of their death benefits may be distributed. Ultimately, the trustee retains control of the distribution of the death benefits. Ie: how the member’s benefit will be paid and to whom – irrespective of who is nominated.
This can be good or bad as it provides the flexibility to make a more appropriate allocation but could also create problems as decisions made by the trustee(s) can be contested. For example, if the trustee(s) paid the benefit entitlement to children of a former marriage (even if done in accordance with the deceased wishes), the children of the current marriage could contest.
A non-binding nomination is valid indefinitely, until actively changed by the superannuation owner.
These allow a member to direct the trustee of the fund as to who receives what portion of their superannuation benefits in the event of their death. As long as the nomination is valid, the trustee has no discretion to pay the benefit to other potential beneficiaries.
This option offers the most certainty that the person(s) nominated will receive the money intended as the trustee(s) must pay the death benefit as nominated. However, it is not necessarily always the best option depending on whether the intended beneficiaries are dependents or rapidly changing circumstances.
Superannuation binding nominations last for three years and then will need to be renewed. However, some superannuation funds offer non-lapsing binding nominations, so make sure you check with your fund. If you have a SMSF, a binding nomination can be non-lapsing if the trust deed allows for it (i.e. they can apply indefinitely). However, many SMSF Trust Deeds require that Binding Nominations need to be renewed every three years.
To bind, or not to bind?
The obvious reason to ‘bind’ your nomination in super is to ensure the money goes where you specifically want it to go and take away any discretion that the trustee would otherwise have.
However, there are circumstances where making a Binding Nomination might not be such a good idea, such as:
- You do not have any Dependants or any family concerns;
- If the beneficiaries include adult children (aged over 18 or if full time student aged over 25), the taxable portion of the member balance will be taxable to the recipient at 15% plus Medicare levy.
- Circumstances changed after doing the Binding Nomination such as marriage breakdown and you didn’t get around to changing it; or
- One of the beneficiaries falls into financial difficulty or addiction and you do not wish for them to use the money to cover their personal debts or habit.
Binding nomination validity
It’s all well and good to simply fill out a form, but to ensure the nomination is valid the following conditions must be met:
- Each nominated beneficiary is a dependant and/or legal personal representative under the SIS Act definition (see below)
- The member clearly states the allocation of their benefit between beneficiaries (i.e. the allocation must total 100%)
- The notice has been signed and dated by the member and two witnesses (not listed as beneficiaries)
- The nomination is not older than three years from the date of signature (see above/your personal circumstances for confirmation of this)
- The nominated beneficiaries are still dependants as at the date of death.
- If a member’s nomination is invalid the benefit (or relevant part of it) will be paid to their Legal Personal Representative (executor). This may not be the most effective outcome as the preference may have been to split among the remaining nominated beneficiaries.
What is a dependent nomination under super?
There are restrictions on who you can nominate under the Superannuation Industry Supervision Act (SIS). It is important to note that whilst the SIS Act sets out who is eligible to receive superannuation death benefits the ATO places further qualifications on the payment of tax-free benefits. Under the SIS Act valid nominations can be made to:
- the Legal Personal Representative in which case the benefit is paid to the Estate; or
- a dependent which is defined as follows:
- Spouse (current or de facto);
- A child of the member (including adopted, stepchild, ex-nuptial, child of your spouse);
- Any other person with whom the member has an interdependency relationship, which covers persons where there is a close personal relationship and one or more provides the other with financial support, domestic support and personal care. We recommend seeking advice if you have circumstances that you think may qualify.
Common mistakes that we see are Nominations being made to parents, brothers or sisters or other relatives, but there is no interdependent relationship so the Nomination is invalid.
Who can receive proceeds of life insurance under Super & potential implications
When should I review my nomination of beneficiary?
- Any time you have a change in circumstances. Marriage, separation, divorce, children, occupational changes, medical changes, winning the lottery etc.
- At the 3 year expiry of a binding nomination
Anything else I should know?
This is all general advice of course, and there are many other things that might need to be a consideration for you such as:
- What happens to your nomination in the event you become incapacitated?
- Impacts of reversionary pension
- The trust deed for your SMSF
- How will benefits be taxed to your beneficiaries?
Again, this can be a highly complex area that requires specialist advice depending on your personal circumstances and wishes in the event of your death. We are here to help you though so please call us on 02 9633 5530 should you need to:
- Update your nominations
- Check your nominations
- Check any of your policy information
- Wish to receive legal advice on your nominations and structuring
- Wish to organise a Will or other legal structures such as Powers of Attorneys, Trusts etc to ensure the right people get your money in the event of your death.
Disclaimer: This information, and any advice provided is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it.