Passing on super requires the same care as making wills
The key objective of estate planning is to ensure that the right people get your assets after you pass away. Traditionally this was done via a will. It is now common for a third or more of a family’s wealth to be in superannuation, however, which is not automatically covered by their wills.
Many people still see a will as a separate exercise from deciding what happens to their super after their death, and take far more care over the former than the latter. People are often unaware that they have made, or should make, a super death benefit nomination (DBN) directing their super fund how to pay their super after their death.
When you set up, or join, a super fund, one of the many forms you complete often says in effect: “My spouse gets my super when I die” – the most basic kind of DBN available. That’s it? What happens if, for example:
- your spouse does not survive you,
- a child has special needs, is not responsible with money or has large debts,
- a child does not survive you, leaving children of their own,
- you want to leave out a child due to their bad behaviour towards you, or
- you divorce or separate before you make a new DBN?
People normally provide for these possibilities their will (or the law covers them automatically) yet they are commonly overlooked when deciding what happens to their super after their death.
The upshot is that passing on your assets outside of super, and your super, should both be addressed as part of the same exercise.
Dealing with super in your will
A properly drafted will should specify how super death benefits are divided up if they are left to your executor. This, of itself, does not guarantee that super will be dealt with under your will. This kind of clause in a will works only if you make a DBN requiring your super fund trustee to pay your super death benefits to your executor, or a super trustee who has not been given a binding DBN decides to pay them in that way.
And it will not always be appropriate to direct your super death benefits to your executor. In many cases it will be better for your surviving spouse, or minor children, to receive your death benefits by way of a pension, bypassing your will entirely.
A correctly drawn DBN will ensure that your death benefits are dealt with in the right way, from among the above alternatives.
Taxation of super death benefits
Non-superannuation assets are inherited tax-free (although they may be subject to capital gains tax on their eventual sale). Super death benefits however, may or may not be taxed in the hands of the recipients, depending on their ages and their relationship to you.
Super death benefits receive more favourable tax treatment (which can be a nil tax rate) if they are paid to a “Dependant” (asdefined in the Tax Act) depending on their age. A Dependant, in this sense, is a surviving spouse, a child under 18, a child over 18 who was financially dependent on you or a person with whom you were in an “inter-dependency” relationship.
The tax differences between the passing of super and non-super assets may mean that, to minimise the overall tax burden on your beneficiaries, you should give a Dependant more of their inheritance by way of a super death benefit and less of your non-super assets, and vice versa for any beneficiary who is not a Dependant.
Some super funds limit DBN choice
Some public and industry super funds only allow non-binding DBNs. These guide the super fund how to pay your death benefits but, as the name suggests, the fund is not legally bound to follow them. Other funds permit binding DBNs, however these must be renewed every three years by law, otherwise they become non-binding.
Further, many super funds deny you the ability to make a DBN which provides for various alternative scenarios which may occur. This will require you to keep your DBN under more frequent review, to ensure it is updated to address changes in your family circumstances, whereas a will can predict and deal with a greater range common possibilities in advance (but also requires periodic review).
A Self-Managed Super Fund (SMSF) gives you maximum freedom in making a DBN. If your SMSF deed is worded correctly (and it can usually be amended if it isn’t) you can make a binding DBN which only expires if you decide to change it, with the same flexibility to deal with super as you have to leave assets under a will.
In certain cases (e.g. you wish to disinherit a child, or implement a detailed estate planning strategy, and you have a public fund which does not allow binding DBNs) you may need to move your super to an SMSF to eliminate the chance of an undeserving beneficiary convincing the fund to grant them a share, or to otherwise ensure you wishes are properly carried out.
As death benefits are a complex area, you should liaise with your financial planner and your lawyer together to ensure that the best advice is given and you have a consistent estate plan, which is documented correctly.
– Stephen Gethin, Director, Fortuna Legal