Your superannuation doesn’t automatically form part of your estate when you die, so it usually isn’t dealt with by your Will. The trustee of your fund holds your death benefits and can pay them either to your dependants or to your estate, depending on the rules of the fund and any binding nomination you have made.
Who can receive your superannuation when you die?
There are strict rules about who you can nominate to receive your super when you die. To control where your benefits go you need a Binding Death Benefit Nomination (BDBN), made directly with your fund on their prescribed form. The law limits who you are allowed to name.
| You can nominate | You cannot nominate |
|---|---|
| a current spouse, including a de facto spouse | siblings |
| your children, including stepchildren | parents |
| someone who is financially dependent on you | grandparents |
| someone in an interdependent relationship with you | grandchildren |
| your legal personal representative, meaning the executor of your estate, for distribution under your Will | friends and charities |
There is a way to leave your super to someone on the right hand list: you nominate your legal personal representative in your BDBN, then gift the benefits to that person in your Will. The BDBN acts as a bridge between your super and your Will.
Financial dependency and interdependency both have strict tests, so get specific advice from your lawyer or financial adviser before relying on either.
What is a binding death benefit nomination?
A BDBN is a direction to the trustee of your fund telling them where to pay your benefits when you die. It binds them for as long as it stays valid.
Most BDBNs expire after three years and have to be renewed. Some funds offer a non-lapsing nomination or a Death Benefit Agreement instead, which works the same way but doesn’t expire. Most funds also allow a non-binding nomination, which means the trustee takes your wishes into account but decides for itself which dependants receive your benefit and in what shares.
If you die without a valid BDBN, your fund chooses who receives your benefits. There is more detail in our post on binding death benefit nominations.
Will your family pay tax on your superannuation?
Some people can receive your super tax free and others cannot, which surprises people who assume there is no tax on inheritances in Australia. That is broadly right, but not for super or for life insurance held inside a super fund.
The group who can receive your super tax free is not the same group you are allowed to nominate. A tax dependant includes a former spouse, who cannot be nominated in a BDBN at all. Whether someone may receive your benefits and whether they receive them tax free are two separate questions with two separate tests.
A tax dependant receives your super and any insurance in the fund tax free. A tax non-dependant may pay tax on part of it, depending on how your balance is made up and how it is paid. The calculations are complex, however the table below is a simplified summary for a lump sum:
| Component | To a tax dependant | To a tax non-dependant, from the fund | To a tax non-dependant, via your estate |
|---|---|---|---|
| Tax free component | Tax free | Tax free | Tax free |
| Taxable component, taxed element | Tax free | 17% | 15% |
| Taxable component, untaxed element | Tax free | 32% | 30% |
Those rates apply unless the recipient’s marginal rate is lower, in which case the marginal rate applies. The “from the fund” figures include the 2% Medicare levy, which doesn’t apply where the fund pays your estate and the estate pays the tax.
Will your superannuation be gifted under your Will?
Whether your super will be gifted under your Will depends entirely on what you have put in place with your fund. Three arrangements produce three different outcomes:
- if you make a valid BDBN in favour of an eligible person, the fund pays your benefits and any life insurance in the fund directly to them, so any direction in your Will about your super is irrelevant;
- if you nominate your legal personal representative, the fund pays your benefits to the executor of your estate, who then gifts them under your Will; and
- if your account is in pension mode and you have nominated a reversionary beneficiary, your benefits usually pass straight to that person. If you have both a BDBN and a reversionary pension, get legal advice on which one takes priority. The two can conflict and the answer depends on the terms of your fund.
Nominating your legal personal representative is a sensible option if you want to leave your super to someone who can’t be nominated directly. It also suits a Will that includes one or more testamentary trusts. However, it also carries a risk: benefits that form part of your estate are available to satisfy claims made against your estate. It’s essential to get specific advice on this option if you are concerned your estate could be challenged.
What if you have a self-managed super fund?
With a self-managed super fund (SMSF) there are two questions to consider regarding your estate planning.
The first is who receives your super. Your fund may allow a BDBN or something similar. Your SMSF is governed by its own deed as well as the superannuation laws, so you need advice that is specific to your fund. This will involve a comprehensive review of the SMSF Deed.
The second is who controls the fund after you die or lose capacity. Control has to pass to someone who will follow your wishes, because that person decides whether your nomination is valid and pays the benefits.
How do you make sure your super goes where you want?
Careful planning and regular review are the only things that reliably get super to the people you intend, because the system leaves a lot of room for things to go wrong. Each fund has its own rules. Non-binding nominations are no more than a wish, but are often misunderstood. There is no minimum period for a de facto relationship in the superannuation rules, unlike the intestacy rules, so a partner of a very short standing can qualify. Trustees decide privately and the review process is limited and can take a long time. Death benefits include life insurance bought through the fund, which for someone who dies young often dwarfs everything else they own.
Best practice for your superannuation includes:
- making a binding nomination (one that needs to be signed and witnessed) rather than a non-binding or preferred beneficiary nomination (which are usually offered as a simple online form);
- checking that the person you name is actually eligible, because naming someone who is not makes the nomination invalid;
- completing, signing and witnessing the form exactly as the fund requires, then confirming the fund has acknowledged receipt;
- checking whether your nomination lapses and renewing it if it does;
- reviewing your arrangements whenever your circumstances change, since a beneficiary who stops being eligible takes your nomination down with them; and
- getting advice on your Will and your nomination together, so the two work as one plan.
Frequently asked questions
Can I leave my superannuation to my brother or my parents?
No, not directly. Siblings and parents cannot be nominated in a BDBN. You can nominate your legal personal representative instead, then gift your super to them in your Will.
Can I leave my superannuation to charity?
No, not directly. A charity cannot be nominated in a BDBN. The same approach works: nominate your legal personal representative and make the gift in your Will.
Do superannuation death benefits form part of my estate?
Only if they are paid to your estate. That happens where you nominate your legal personal representative in your BDBN. It also happens where the trustee decides to pay your estate. Benefits paid directly to a person under a BDBN don’t form part of your estate and aren’t subject to claims challenging your Will.
Does my Will override my binding death benefit nomination?
No. A valid BDBN in favour of an eligible person is followed by your fund and your Will has no effect on those benefits. Your Will only governs your super if the benefits are paid to your estate.
We will get your super and your Will working together
We prepare Binding Death Benefit Nominations and check them against your Will so the two work as one plan. For a self-managed super fund we review your deed and trustee arrangements, so the right people receive your benefits and the right person takes control when you die or lose capacity. The tax, estate planning and social security consequences all interact, so we work alongside your financial adviser if you have one. Call the Wills team on (08) 9220 4433 or book an estate planning consultation.
Related: what is a superannuation proceeds trust?
This article contains general information about superannuation death benefits. It is not legal advice. You should obtain professional legal, taxation and financial advice about your estate planning.
