Reversionary Beneficiaries – What happens if they die before the member?

Bill has just commenced an account based pension payable from the B&M SMSF.  The pension is reversionary to Mary, who is Bill’s wife.  If Mary dies before Bill, what happens to Bill’s pension?  Does the pension stop? Does the pension continue?  Must the pension be re-started?  Must the pension be varied to appoint another reversionary beneficiary?  Does the pension end on Bill’s death, or is the pension payable to Mary’s estate?

If the reversionary beneficiary (that is, Mary) dies before Bill, the pension does not stop and it will continue to be payable to Bill.  However, Bill should consider whether the pension should be changed.

If Bill does nothing

If Bill does nothing, does the pension, on his death, then become payable to Mary’s estate?  The answer is no: the pension cannot be paid to Mary’s estate.  The SIS provisions do not permit an income stream to be payable to an executor of an estate (whether Mary’s or Bill’s estate).  So, could the pension be commuted and the pension account balance paid as a lump sum to Mary’s Estate?  The answer is again, no.  Mary’s Estate (that is the Legal Personal Representative of Mary’s Estate) is not a dependant of Bill and so the pension account balance cannot be paid to Mary’s Estate. 

The account pension balance could be paid Bill’s Estate (that is the Legal Personal Representative of Bill’s Estate) as the SIS Regulations expressly permit (but do not require) the death benefit of a member to be paid to the Estate of the member.

Alternatively, Bill’s pension account balance could be paid to or amongst Bill’s dependants who have survived him.

Must the pension be changed to remove the beneficiary nomination?

There is no legal obligation to alter the pension terms to remove Mary as the reversionary beneficiary.  As Mary has died before Bill, the reversionary provisions cease to have any effect.  However, the pension provisions could be varied to remove the reversionary beneficiary nomination of Mary.

Can Bill appoint a replacement reversionary beneficiary?

In short, yes.  However, the replacement reversionary beneficiary must be a dependant of Bill. 

Can Bill appoint a replacement reversionary beneficiary without first stopping the pension?  This depends on the provisions of the Governing Rules/Trust Deed and the provisions of the pension.  If the Governing Rules/Trust Deed expressly permit the pension terms to be varied by changing the reversionary status of the pension and the pension terms do not expressly prohibit such a variation, then it is possible to vary the terms of the pension without stopping the pension to appoint a replacement reversionary beneficiary. 

If the Governing Rules/Trust Deed does not permit the pension to be varied to permit a change of reversionary status of the pension, then either the Governing Rules/Trust Deed must be appropriately amended or the pension stopped and restarted with the new reversionary beneficiary.

Can Bill appoint his adult child as a reversionary beneficiary?

Again, yes.  However, as an adult child generally cannot receive a death benefit in the form of an income stream, the benefit must be paid as a lump sum.

Can Bill appoint all his adult children as reversionary beneficiaries?

Yes – but he must specify the proportion that each adult child is to receive and as adult beneficiaries, their share of the pension must (subject to two exceptions) be paid as a lump sum. 

The two exceptions are (a) that the adult child is under age 25 and financially dependent on Bill and (b) the adult child is disabled (to the extent specified in the SIS provisions).  In relation to the first exception the pension must cease at age 25 and any unpaid balance must be paid as a lump sum to the adult child.  In the second case, the pension may continue to be paid beyond the child attaining age 25.

If Bill appoints an adult child as a reversionary beneficiary, George, and George predeceases Bill, does the reversionary pension which would have gone to George on Bill’s death, go to George’s children?

Generally, no.  For this to occur, the grandchild must be a dependant of Bill.  However, a grandchild is not a dependant merely due to the family relationship.  A grandchild could be a dependant of Bill by being financially dependent on Bill or being in an interdependency relationship with Bill.  However, these are high thresholds to satisfy.

Is it relevant that the grandchild is a dependant of George?  No, as George has predeceased Bill.

What would be the situation if George survived Bill, the pension transferred to George (as George was financially dependent on Bill, and was aged less than 25 at Bill’s death – so George fell within an exception to the general rule that a pension cannot transfer to a child over age 18)?  In this case, the grandchild would be a dependant of George if under age 18.  Can the pension further transfer to such a grandchild?

There are two views on this matter.  One view is that for any individual to receive a lump sum or pension sourced from Bill’s death benefit, that individual must be a dependant of Bill.  The other view is that if the grandchild is a dependant of the immediately preceding recipient of the pension (being George) then that is sufficient.  The SIS provisions do not address this situation.  The drafting of the SIS provisions contemplates that there may be a succession of reversionary beneficiaries, so that the pension goes from A (the member) to B then to C.

The first view is certainly the more cautious view.  Also, this view more readily complies with the sole purpose test: that is the superannuation death benefits are for the dependants of the member and not for the dependants of the dependants of the member.