It is important to understand the interplay of the laws governing superannuation, tax and succession when planning your estate.

Appreciating how these laws interact can help avoid some common pitfalls in estate planning and may have a significant impact on the net (after-tax) proceeds received by your beneficiaries.

When we refer to ‘death benefits’ we generally mean the accumulation of a deceased person’s superannuation account and the proceeds of any life insurance policies held in superannuation.

These funds are treated in a specific manner after a person dies.

Who gets my superannuation when I die?

Superannuation benefits may not automatically form part of a deceased person’s estate. The common misconception that they do, can have unintended consequences.

The Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) governs superannuation funds and provides that a fund can only directly pay a death benefit to a dependant of the fund member or otherwise, to the estate.

A ‘dependant’ under superannuation laws includes a spouse (including a de facto partner of same or opposite sex), a person with whom the fund member had an interdependency relationship, a child of any age or a person who is financially dependent on the member. A child includes a biological child, adopted child, step child and ex-nuptial child.

An interdependent relationship is one where two persons live together and are in a close personal relationship and one or both provide financial, personal and / or domestic support to the other. This definition encompasses relationships that may not otherwise fit within the narrower definition of dependant such as a parent-child or sibling relationship.

The importance of a Binding Death Benefit Nomination

A Binding Death Benefit Nomination (BDBN) completed by the fund member compels the trustee of a superannuation fund to pay death benefits to a deceased member’s nominated dependant or to his or her estate. Only if the funds are nominated to be paid into the estate, can they be distributed according to the deceased person’s Will.

Completing a valid BDBN is an important step in estate planning. If no BDBN exists then the trustee of the superannuation fund will have discretion in paying the death benefits to a dependant or to the estate. The trustee will consider the relationship of the fund member and the proposed beneficiary and their financial needs. The following example demonstrates the importance of a BDBN.

A person may make a Will leaving his or her entire estate to a certain beneficiary, mistakenly thinking that the estate will automatically include the value of death benefits.

If no BDBN is in place, the trustee of the superannuation fund will have discretion to pay the benefits to an SIS-defined dependant who may not be the same person as the one intended to benefit under the Will.

A BDBN is typically only valid for three years. If you have made a BDBN, it is important to note when the nomination will lapse to ensure you update when the time comes. It is also important to review a BDBN if your circumstances have changed, such as a separation from your spouse. You may wish to revoke or update your BDBN to ensure your intended beneficiaries receive the value of your death benefits.

Death benefits and tax

When planning your estate, it is also important to understand the tax implications on the payment of death benefits to your beneficiaries.

This is an important consideration in estate planning and guidance by a financial professional and lawyer can make a significant difference to the net proceeds received by your loved ones after you die.

Key points

• It is important to consider the way death benefits are treated when a fund member dies, and to plan your estate accordingly.
• Superannuation funds are legally required to pay death benefits directly to an SIS-defined dependant or in the absence of such a dependant, to the estate.
• A valid BDBN nominating a dependant beneficiary or your estate will circumvent the superannuation fund’s discretion and ensure your intended beneficiaries receive these payments.
• The tax consequences on death benefits will vary depending on your nominated beneficiaries. Assets from your estate can be distributed in ways that may result in better taxation outcomes for the recipients – good estate planning advice can help maximise the overall benefits received by your beneficiaries.
• In some circumstances, the payment of death benefits to a certain beneficiary may be challenged. An estate planning lawyer can help with strategies to reduce the potential for future family provision claims.
• It is important to regularly review any BDBN to ensure it is still valid and is line with your intended outcome.

Conclusion

Understanding the way superannuation death benefits are treated when a person dies is an important step in estate planning, particularly when these funds comprise a large portion of your estate.

This information is for general purposes only and you should obtain professional advice that is tailored to your individual circumstances.

If you know someone who could benefit from this advice please suggest they contact us on 02 4322 0251 or email [email protected].