When the Keating government introduced compulsory superannuation back in the 1992 it changed the way Australians think about funding their retirement. It has also meant that, outside of the family home, superannuation now forms a significant proportion of most Australians overall wealth. When we die it is important that this wealth flows efficiently and effectively to our dependants.
A superannuation death benefit is made up of the contributions that have been made to the fund by employers or personally by the member, and also any insurance component payable as a result of the member’s death. This can result in the death benefit being substantially more than you would have otherwise expected. People often don’t even realise they have life insurance as part of their super. Sometimes it is bundled in with income protection and total and permanent disability insurance and so it gets over looked.
As a general rule it is up to the trustee of the superfund to decide who the death benefits are to be paid to. The Superannuation Industry (Supervision) Act 1993 (“SISA”) stipulates that payment can only be made to a dependant or to the deceased’s legal personal representative. A dependant is defined as:
- a spouse, including a de facto or same sex partner of the deceased;
- a child of the deceased, regardless of age; or
- someone who was in an interdependent relationship with the deceased at the time of death.
People in these categories can receive the benefit directly from the superfund.
If you specifically want to benefit someone who would not meet the dependency criteria, for example, a grandchild, you would have to have the relevant portion paid to your legal personal representative and then make the appropriate provision in your Will.
The same rules apply regardless of whether your superannuation is in a retail fund, an industry fund or a self-managed fund. In addition to the SISA rules the trustees of the superannuation fund will also be governed by the trust deed which may place further restrictions to how, and to whom, payments can be made.
One way to ensure that your superannuation death benefit goes where you want it to go, is to put in place a Binding Death Benefit Nomination (“BDBN”). BDBN’s are particularly important for retail and industry funds as the trustees of those funds are not necessarily going to make decisions with the whole of your Estate Planning in mind. Locking them in with a BDBN is essential to ensure that your wishes are carried through.
If there is no BDBN in place the trustee of the superfund has to exercise its own discretion in relation to the payment of the benefit. This can result in lengthy delays and challenges by competing dependants. It is not uncommon for disputed superannuation claims to take over a year to resolve and the final result will not necessarily reflect your wishes.
If you have a self-managed superfund and the control of the fund is going to pass to someone you trust, you may decide to leave them with a little more flexibility. Depending on your circumstances, it may be appropriate to pass control of your SMSF to your Executor with specific directions in your Will regarding the distribution of the superannuation death benefit. Alternatively it may be better to keep the superfund and the estate separate particularly if different people are to benefit in each case.
Another reason to keep your superannuation out of your estate would be if there was a possibility that the estate might be insolvent. If that were the case then having the superannuation flow directly from the fund to the intended beneficiaries would protect it from the estate creditors.
The advantage of including your super in your Estate Planning strategy is that you can take into account the different tax consequences of death benefits that flow to different classes of dependants. Not all superannuation dependants qualify as dependants for taxation purposes and this might influence your decisions regarding the overall division of your wealth.
For example you may have a spouse and an adult child who you want to benefit equally and a similar amount inside and outside super. Your spouse will be able to receive a superannuation death benefit tax free, but in most cases the adult child will not. In these circumstances you could make a BDBN in favour of your spouse in relation to the superannuation and leave the other non-superannuation assets to your child.
Although superannuation is primarily designed to provide retirement income it also figures in any comprehensive Estate plan. As with all these things there is no one answer that will suit all clients.
Our aim when we sit down to discuss these matters with you, is to work out what is going to work best for your family.
Article By: Ann Eagle