One of the most significant assets in Deceased estate administration is the deceased’s superannuation (which will often include a life insurance policy)(referred to throughout as a ‘death benefit’). Unfortunately, most people have a limited understanding of who their superannuation is paid to upon their death. Many of our estate planning clients come to us with the misconception that their death benefit forms part of their estate. In the alternative we hear clients believing that they have nominated a beneficiary they want their death benefit to go to, however, they do not realise that the way they have made the nomination may not be binding on the Trustee of the relevant superannuation fund.
In our experience, a misunderstanding on how to make a nomination/or not having any nomination can cause the following consequences:
- Unintended beneficiaries receiving the death benefit
- The death benefit forming part of the estate which could be subject to a family provision claim
- Challenges by potential beneficiaries to the death benefit can take some time to resolve and could proceed to a complaints process through the Australian Financial Complaints Authority
- Unintended tax consequences
To clarify, your superannuation death benefit does not automatically form part of your estate on your death. Who it is paid to will depend on:
- Your superannuation fund
- The fund’s trust deed and governing rules
- Relevant superannuation legislation and governing rules
- Whether any nominations are in place
There are also different types of nominations, such as; a non-binding nomination, a binding death benefit nomination, non-lapsing binding death benefit nomination and a revisionary nomination. What type of nominations are available to you will depend on what your fund’s trust deed permits.
There are various rules and procedures on how you can make these nominations and they will be stipulated in your fund’s trust deed. Many retail and industry funds require a binding death benefit nomination to be updated every 3 years. There are some funds that permit a non-lapsing binding death benefit nomination. Many superannuation funds (including self-managed superannuation funds) will have a specific form and requirements for permitting a binding death benefit nomination. What is important is that you understand what your superannuation fund permits and that you make any nominations in accordance with their trust deed.
For many people, a binding death benefit nomination to a dependant can be an effective estate planning tool for the following reasons:
- Reduces the pool of estate assets, limiting the assets that could be challenged through a family provision claim
- Not needing a grant of letters of administration or probate to access the funds – meaning your intended beneficiary could access the funds sooner
- Protection from estate creditors
Under superannuation law, the following people are considered dependents of the deceased person (s 10 of the Superannuation Industry Supervision Act 1993 (Cth):
- Their spouse
- Their Child (of any age)
- An interdependent of the deceased
An example of the consequences of not having a binding death benefit in place:
Take for example Mr C, who passes away. He has 2 children from a previous relationship and a new wife. Mr C made a nomination online in his account to have his death benefit paid to his new wife upon his death. What Mr C did not realise is that this was not binding on the Trustee of the superannuation fund. Mr C’s fund required a binding death benefit nomination form to be signed and witnessed by 2 people and sent to the fund. Pursuant to the fund’s trust deed, the Trustee was not obliged to pay the funds to Mr C’s new wife and what ensued was competing claims from the two children and the new wife. The superannuation fund was determined to pay part of the funds to the children and part of the funds to the new wife. The new wife disputed the fund’s decision as she wanted 100% of the funds. The children also disputed the decision claiming they should be entitled to a larger share of the funds. The dispute ended up going to the Australian Financial Complaints Authority to be resolved and took a number of months, meanwhile, none of Mr C’s family members had access to his death benefit. It caused all of Mr C’s family stress, heartache, time and money. All of this could have been resolved if Mr C had made a valid binding death benefit nomination in accordance with his fund’s trust deed. His new wife would not have had to go through the stress of competing claims with Mr C’s children and she would have had access to the funds sooner.
Another important consideration which many people are not aware of is that a dependant under superannuation law differs from a dependant under tax law. The definition of a dependant of a deceased for tax purposes is (s 302-19 Income Tax Assessment Act 1997 (Cth)):
- Their spouse or former spouse
- Their child under the age of 18
- An interdependent of the deceased
- Any other perron dependant on the deceased
Depending on who the death benefit is paid to will determine the tax treatment of that payment. If a lump sum death benefit is paid to a tax act dependant, then the lump sum will be tax-free (s 302-60 Income Tax Assesment Act 1997 (Cth)). There are different tax outcomes if the benefit is paid to the trustee of the estate of the deceased (and who the beneficiaries of the estate are) and if it is paid as an income stream.
In some circumstances, it may be appropriate to have a binding death benefit nomination to your legal personal representative (this would then form an asset of your estate).
What type of nomination and who to nominate will depend on your objectives, your individual circumstances, what your fund permits and the relevant legislation. It is important that you seek advice on your particular circumstances. Our estate planning solicitors can assist you in the process. Our tailored advice on superannuation death benefits is standard in all of our estate planning packages.
If you need assistance, book an appointment by clicking here or phone our office on 6381 9500.