Case Study: The Importance of Structuring Death Benefit Agreements Correctly

Planning for the Unexpected

Superannuation is often one of the biggest assets a person has, but many people don’t realise that it doesn’t automatically form part of their will. Even if you’ve carefully planned your estate, your super could end up in the wrong hands or attract unnecessary tax, if it’s not structured correctly.

Today, we’re sharing an example of how a simple mistake in a Death Benefit Agreement led to unintended consequences and a hefty tax bill.

Meet James

James was in his mid-40s, running a successful business, and had been growing his superannuation for years through his Self-Managed Super Fund (SMSF). He had always been clear about what he wanted to happen if he passed away—50% of his super should go to his long-term partner, Sarah, and the other 50% should go to his younger brother, Ben, to help him buy his first home.

Thinking he was covering all bases, James signed his Death Benefit Agreement in his SMSF, believing this would ensure the right split. When James passed away unexpectedly, his Executor discovered an issue...

The Problem: Ben Was Not a ‘Dependant’ Under Super Law

Superannuation law has strict rules on who can receive a death benefit directly from an SMSF. (Read more from the ATO here) To qualify as a dependant, a person must be:

• A spouse or de facto partner

• A child (of any age)

• A person who was financially dependent on the deceased

• A person in an interdependency relationship with the deceased

  
  

Ben, as James’s brother, didn’t qualify under any of these categories. This meant that his 50% share in the Death Benefit Agreement was invalid. Since Ben wasn’t legally eligible to receive super benefits directly, the trustees had no choice but to pay 100% of the super to Sarah.

Enter: Tax treatments

Sarah, knowing that James had wanted his brother to receive half of his superannuation, decided to transfer 50% of the benefit to Ben herself. However, because she had received the super as a death benefit payment, when she passed the money on to Ben, it was considered a personal payment from her—not an official superannuation benefit.

The result? Ben had to pay tax on the amount he received. If James had structured his super differently, this could have been avoided entirely.

How do you avoid this: Using a Will Instead

James’s mistake was relying on a Death Benefit Agreement to distribute his super to someone who wasn’t an eligible dependant. A better approach would have been to structure his super so that it was paid into his estate instead.

If James’s super had gone into his estate, his will could have dictated that 50% go to Sarah and 50% go to Ben. Since a will is not subject to the same dependency rules as superannuation law, Ben would have been a valid beneficiary, and no extra tax would have been payable.

This small but crucial difference could have ensured that James’s wishes were carried out exactly as intended—without extra tax or legal complications.

What This Means for You

James’s story highlights why checking your Death Benefit Agreement regularly is crucial - Superannuation laws change regularly.

Superannuation doesn’t automatically follow the instructions in your will. If you’re naming someone in a Death Benefit Agreement for your super, they must be an eligible ‘dependant’ under superannuation law. If you want to distribute your super more flexibly, directing it to your estate first is often the best solution.

What are the next steps?

This story highlights why it’s essential to review your estate planning regularly. 

So, what should you do next?

🔹 Check your Death Benefit Agreement (DBA). If you have one, take a look at who you’ve nominated and make sure they meet the current legal definition of a superannuation dependant. If you're not sure, now is the perfect time to review it.

🔹 Consider whether a Binding Death Benefit Nomination (BDBN) is a better option. A DBA gives discretion to your SMSF trustee, whereas a BDBN legally locks in your chosen beneficiaries. If you want certainty that your super will go exactly where you intend, a BDBN might be the better choice.

🔹 Think about updating your DBA or nomination. If your current setup doesn’t reflect your wishes—or if there’s any doubt about whether your beneficiaries qualify under superannuation law—it may be time to make a change.

Estate planning is something that shouldn’t be “set and forget.” It’s a good idea to review your nominations regularly to ensure they still align with your personal and financial circumstances. A little planning now can save your loved ones from major stress later.

If you’re unsure whether your nominations is set up the way you intended, it might be time for a review.