Binding nominations and your spendthrift children
Recently we discussed how binding death benefit nominations work to ensure your superannuation ends up in the right hands when you pass away.
One reason this might be important is to protect your children from themselves when it comes to managing large lump sums of money as our example below outlines.
James and his poor financial management
Jane was recently widowed and has two adult children, James and Jenny.
Jane has $600,000 in her retail superannuation fund made up of a balance of contributions of $350,000 as well as life insurance of $250,000.
Jane has always been concerned about James’ inability to manage his financial affairs. When Jane dies, she would like James to inherit half of her estate, but in a way that will provide James and his young family with an income for many years to come rather than a lump sum of money.
As Jane’s superannuation fund permits her to make a binding death benefit nomination, she nominates her legal personal representative (her estate) to be the recipient of her superannuation benefit when she dies.
Jane also prepares a Testamentary Trust Will, in which James receives his share of her inheritance in a trust. The will appoints James to be the primary beneficiary of the trust but appoints his sister Jenny* to act as trustee of the trust thus protecting James’ inheritance.
When Jane dies her $600,000 superannuation benefit (less any tax) is paid to her estate in accordance with her binding death benefit nomination and forms part of the assets over which the testamentary trust is established.
Jenny, as trustee, can vary the distribution of income and capital to James and his family, not only to control the funds he receives but also to maximise the tax efficiency of the trust.
In the absence of a binding death benefit nomination from Jane, the trustee of the superannuation fund could have exercised its discretion to pay all or a share of the death benefit directly to James as a lump sum. This would have meant that James’ ability to access the superannuation benefit was unrestricted and could have led to him misusing or losing his inheritance.
*If you think appointing a sibling may cause too much sibling angst you can always appoint another family member or an independent third party such as an accountant or financial advisor.