Despite common misconceptions, your superannuation doesn’t automatically form part of your estate when you die. Superannuation death benefits are held by the trustee of the fund who can pay the benefits to your dependants or to your estate in accordance with the rules of the fund and any binding death benefit nomination in place at your death.
There are many factors to consider when creating a strategy for where your superannuation benefits should pass if you die, including:
- Who can receive your super benefits if you die? Unfortunately, you can’t just nominate anyone you choose and there are strict rules to follow to ensure any nomination is binding.
- Will any tax be payable on your super benefits when received by your loved ones? Some people can receive your super benefits tax free, and others will have to pay tax.
- Will your super benefits be included in the assets which are gifted under your Will?
- Do you want to lock in a plan for when you die, or would you prefer to leave flexibility with your loved ones?
1. Who can you receive your superannuation benefits if you die?
If you want to control where your superannuation benefits go on your death, you need to make a Binding Death Benefit Nomination (otherwise known as a BDBN). A BDBN must be made directly with your super fund using their prescribed form. There are strict rules for signing and witnessing a BDBN. There are also rules about who can be nominated in your BDBN to receive your superannuation benefits:
If you are nominating someone who is a financial dependant or in an interdependent relationship with you, it’s important you get specific advice from your lawyer or financial adviser because there are strict tests that must be satisfied.
If you want your super to go to someone who is not allowed to be nominated in your BDBN, you can nominate your legal personal representative in your BDBN and then use your Will to gift your super benefits to your chosen recipients.
2. Will tax be payable on your super benefits?
It is common to assume there is no tax payable on inheritances in Australia. This is generally correct, however the rules are different when it comes to your super and life insurance in a super fund.
Tax Dependants can receive your super benefits and any life insurance held in your super fund tax free when you die.
If a Tax Non-Dependant receives your super benefits, they may have to pay tax on part of the super benefits.
The tax payable by Tax Non-Dependants will depend on how much of your super balance is comprised of concessional and non-concessional contributions (i.e. whether tax was paid on the money before it went into your super account).
It will also depend on whether they will receive your super benefits as a lump sum payment, or as an income stream (or pension).
The calculations are very complex however the table below provides a simplified summary of the tax payable if your super is paid as a lump sum:
Not everyone is eligible to receive your super benefits as an income stream, and there are complex rules about how long the income stream can be paid for (especially in the case of minor children becoming adults) and how much money can be allocated to the income stream.
The tax treatment depends on your age at the date of your death, and the age of each recipient of your super benefits.
We recommend working with a financial adviser who can give you detailed advice about the likely tax consequences of paying your super and life insurance within super to your chosen recipients.
3. Will your super benefits be included in the assets which are gifted under your Will?
If you make a BDBN to pay your benefits directly from the super fund to the recipient
If you nominate a loved one in your BDBN to receive your superannuation death benefits, then your superannuation benefits (and any life insurance in your superannuation fund) will be paid directly to them from the superannuation fund.
Any direction you leave in your Will to gift your superannuation benefits will be irrelevant.
If you have a reversionary pension in place
If your super account is in pension mode and you have nominated a reversionary beneficiary for your pension when you established the pension, then your super benefits will usually pass directly to the person you nominated as your reversionary beneficiary.
If you have both a BDBN and a reversionary pension, it’s essential to get legal advice to confirm which will take priority.
If you make a BDBN to pay your benefits to your legal personal representative
If you nominate your ‘legal personal representative’ in your BDBN, then the superannuation fund will pay your superannuation death benefits to the executor of your estate, and then the executor will gift your superannuation benefits in accordance with your Will.
This can be a sensible option if:
- you want to leave your superannuation to someone who is not eligible to be nominated directly in your BDBN; or
- you are including one or more testamentary trusts in your Will.
The BDBN serves as a ‘bridge’ between your superannuation and your Will.
It is important to note that if your super benefits form part of your estate to be dealt with by your Will, they will be available to satisfy challenges made against your estate. As such, you should obtain specific advice from your lawyer about the appropriateness of this option if you are worried that your estate could be challenged.
4. Locking in a plan vs. flexibility
In most cases, if you want to control where your superannuation benefits go on your death, you should make a BDBN.
The BDBN tells the people in charge of your superannuation fund (the Trustee) where to pay your benefits if you die.
It’s not always necessary to make a BDBN.
If you have a self-managed super fund (SMSF), you need to give careful consideration to both who will receive your death benefits and who will control the SMSF after you die or lose capacity.
If you have control over who will manage the SMSF after your death or incapacity, and you trust those people implicitly, you can choose not to make a BDBN and let the Trustee of the SMSF decide who will receive your super benefits instead.
Leaving flexibility with the Trustee of the SMSF can be a sensible strategy where there is not expected to be any conflict in the family and you want your loved ones to have flexibility to obtain advice from their financial adviser about where the super benefits should pass, considering the superannuation and tax rules at the time.
Below is a summary of the advantages and disadvantages of each approach:
It’s important to obtain specific advice from your lawyer and financial adviser about the appropriate strategy for your superannuation benefits, as there can be complex tax, estate planning and social security considerations when making this decision.
If you have any questions, please contact us to book an estate planning conference.
