Many young people don’t consider superannuation. Apart from receiving an annual statement and noticing your employer contributions on your payslip, it can often fall under the radar.
But for many retirees, superannuation is their next largest asset after their home.
But, what happens to your superannuation when you die? Many people assume it is dealt with under their Will.
However, superannuation death benefits do not automatically form part of an estate, and cannot be dealt with primarily in a Will.
Whether you have an industry superannuation fund or a self-managed superannuation fund (Fund), the Superannuation Industry (Supervision) Act 1993 and Regulations 1993 (SIS Act and SIS Regulations) regulates where it goes, as well as any Binding Death Benefit Nomination (BDBN). We explain below why it’s then important to consider your Superannuation in your Estate Plan.
Payment of Superannuation Death Benefits
The death of a Fund member triggers a compulsory payment, also know as the death benefit.
The SIS Regulations provide how to make a death benefit payment and to whom. Importantly, the Regulations also provide the Trustee of the relevant superannuation fund with absolute discretion as to paying out the death benefit.
Regulation 6.22 of the SIS Regulations provide that the trustee of a Fund can pay to any “dependent of the estate”.
Section 10 of the SIS Act defines dependent as the deceased’s spouse, children or people who are at the date of the deceased’s death either financially dependent on the deceased, or in inter-dependency relations with the deceased member.
While this may sound straightforward, consider the implications for a separated party in a de facto relationship or marriage, stepchildren and adopted children, and the murky grey area of an “interdependency relationship” which can be anything from same-sex couples to parents and children or siblings who live in the same house.
Ultimately, the SIS Act and Regulations along with the trust deed of the Superannuation Fund guide the Trustee. However, it is not a given that it will go to the estate of the deceased. It could be paid directly to the dependent of the party without regard to the deceased’s Will.
Superannuation Death Benefits in a Will
The only way a death benefit forms part of an estate is if the trustee exercises its discretion or the deceased left a binding death benefit nomination favouring the Estate.
At times, it is preferable to pay the death benefit to the Estate, particularly if the deceased’s Will contains a Testamentary Trust that the death benefits could be paid into.
Of note is the complex tax treatment of superannuation death benefits. Under the SIS Act, if the beneficiary of the death benefits is a dependent, it will be tax-free.
If the beneficiary of the death benefits is not a dependent (such as an adult child of a party), the beneficiary of the death benefits will be required to pay tax at an assessed tax rate.
You can overcome this issue through a comprehensively drafted Will containing both a superannuation death benefits trust and an adjustment of entitlements clause. This helps balance superannuation death benefits with other assets between dependants and non-dependents in Wills.
Binding Death Benefit Nominations
To avoid uncertainty and limiting the trustee’s discretion, Section 59 of the SIS Act and regulation 6.17A of the SIS Regulations allow the member of a superannuation fund to make a nomination that is binding on the trustee as to how their death benefit must be paid upon death.
However, it should be noted that in a retail or industry superannuation fund, the binding death benefits nomination is only binding for a maximum of three years. After this period it lapses and is no longer binding on the trustee.
It is then important that you consider making a Binding Death Benefit Nomination every three years to keep your fund up to date, and ensure your wishes are met if you pass away.
Binding death benefit nominations can be made either to the Estate or a particular dependent (such as a spouse or dependent child). You should, however, seek professional advice as to the best course of action to take so that any nomination made has the intended outcome.
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