www.esuperfund.com.au

How a Death Benefit Agreement Works


chat pdf print

 
 
Your Super Benefit does not form part of your Estate

Under current Superannuation Laws, your Super Benefit does not form part of your Estate on your death. This means that your Super Benefit will not be automatically distributed in accordance with your "Will" on your death. So in the event that you do not have a Death Benefit Agreement in place of your death (see below), your Super Benefit will be distributed in accordance with the provisions of your SMSF Trust Deed. The SMSF Trust Deed used by ESUPERFUND currently states that to the extent that no Death Benefit Agreement has been made to your SMSF prior to your death, your Super Benefit may be distributed in accordance with the discretion of the remaining Trustees of the SMSF. This may or may not comply with your intentions and more importantly may result in an unfavourable tax outcome. In addition the remaining Trustees may disagree on how to distribute your Super Benefit on death creating legal issues most of us would prefer to avoid. To avoid these complications it is strongly recommended that all Members of a SMSF execute a Death Benefit Agreement once their SMSF has been established.

 
 
Death Benefit Agreement

To ensure that your Super Benefit is distributed in accordance with your wishes on your Death you must make a Death Benefit Agreement. A Death Benefit Agreement "binds" the Trustees of your SMSF to pay your Super Benefit as you intend and not at the discretion of the Trustees. Please note that the Death Benefit Agreement used by ESUPERFUND differs to a Binding Death Nomination because it does not lapse after 3 years as is the case with a Binding Death Nomination. This is because the Death Benefit Agreement actually forms part of the Trust Deed and thereby binds the Trustees of the Fund to pay the benefit to the nominated beneficiaries specified in the Agreement. Features of the Death Benefit Agreement are as follows:

  • The Death Benefit Agreement forms part of the Trust Deed (our Trust Deed is compliant)
  • The Agreement is in writing
  • The persons noted in the Agreement are made to Permitted Beneficiaries (see below)
  • The amount to be paid to each person is clearly specified
  • The Agreement is non-lapsing
  • The Agreement is signed and dated in the presence of a witness over 18 who is not nominated to receive a benefit

 
 
Avoid Exposure of your Super Benefit to Legal Action

The classic example of what can go wrong if you do not execute a Death Benefit Agreement, is the case Katz vs Grossman, which stemmed from the death of Ervin Katz in 2003. In that case, the father (Katz) had been the sole remaining member of a SMSF. After his wife's death, he appointed his daughter as an additional trustee to the SMSF to allow the SMSF to continue. Before he died, he also indicated as part of his Will that he wanted to leave the money equally to his son and daughter. He did not complete a Death Benefit Agreement. After the death of Ervin Katz, his daughter had her husband join as a SMSF Member, which gave them control of the SMSF. The daughter then refused to pay her father's benefit according to the terms of her father's non binding request, triggering legal action by her brother (Ervin Katz's son). The Court Case cost several hundred thousand dollars in legal fees, but by not adhering to her father's request the daughter did not break the law. She had full control. All the above could have been avoided with a simple Death Benefit Agreement. In that case the benefit must be paid in accordance with the father's intentions. The daughter in the above case would have had no control over the benefit.

 
 
Permitted Beneficiaries

Under a Death Benefit Agreement, you can nominate the following beneficiaries to receive your Super Benefit on death. Each beneficiary is further explored here.

Spouse (includes former Spouse, DeFacto and same sex couples)
Child (including an adopted or step child)
Any Person who was a Dependant just before death (ie relied on you for financial maintenance)
Any Person with whom you had an 'Interdependency Relationship' just before death
Your Estate via your Legal Personal Representative (this is usually the Executor of your "Will")

 
 
Who keeps the Death Benefit Agreement?

When you apply for a Death Benefit Agreement ESUPERFUND will send you three copies of the Death Benefit Agreement documentation. The Death Benefit Agreement should be maintained by three parties to ensure your intentions are followed. A copy should be kept by you, a copy should be kept by the SMSF Administrator (ie ESUPERFUND) and a copy should be kept by your legal representative who prepared your "Will" for you.

 
 
Update every 3 years Not Required

A Death Benefit Agreement is Non Lapsing. That is the Death Benefit Agreement used by ESUPERFUND differs to a Binding Death Nomination because it does not lapse after 3 years as is the case with a Binding Death Nomination. This is because the Death Benefit Agreement actually forms part of the Trust Deed and thereby binds the Trustees of the Fund to pay the benefit to the nominated beneficiaries specified in the Agreement.

 
 
Payment of Super Benefit on Death

When you die your Super Benefit must be paid to the nominated beneficiaries (if there is a Death Benefit Agreement in place) or by the remaining Trustees at their discretion (if there is no Death Benefit Agreement in place) as soon as practicable after the Member's death. There are no legislative guidelines on what constitutes "as soon as practicable" and is generally assumed to be within 6 to 12 months after death.

If the beneficiary is a dependant of the deceased, the death benefit can be paid as either a lump sum or Pension. If the beneficiary is not a dependant of the deceased, the death benefit must be paid as a lump sum.

Dependants of the deceased

You are a dependant of the deceased if at the time of their death you were:

  • their spouse or de facto spouse, including different or same sex
  • a former spouse or de facto spouse, including different or same sex
  • a child of the deceased under 18 years old
  • in an interdependency relationship with the deceased
  • any other person dependant on the deceased.

Death Benefit Pensions

A Death Benefit Pension is commenced when death benefits are received from the deceased in the form of Pension. A Death Benefit Pension is essentially a Simple Account Based Pension, therefore it is subject to the Transfer Balance Cap. The value of a Death Benefit Pension paid to a dependant will be credited to the dependant’s transfer balance account. Beneficiaries will need to manage their affairs to ensure that a Death Benefit Pension does not result in exceeding their transfer balance cap.

Importantly, a superannuation death benefit cannot be held in an accumulation interest. This contravenes the regulatory requirement to cash the benefit out of the system as soon as practicable.

 
 
Death Benefit Agreement Fee

It is FREE to implement a Death Benefit Agreement with ESUPERFUND.

 
 
Apply Now

To implement a Death Benefit Agreement for each member of your SMSF simply visit and submit an online application here.