21 July 2020
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
It’s important to have an estate plan to ensure that in the event of death – as morbid as it sounds – your estate assets and interests go to the right person(s) in a timely manner. You should also review it every five years or earlier for a major family event.
Your superannuation, however, is not an estate asset and therefore isn’t dealt with via your will unless you specifically leave it to your legal personal representative (LPR) – generally the executor of your estate.
Dealing with Super
Your super can end up in the hands of whoever you want, but your super fund can only pay certain beneficiaries directly, as super law dictates eligible dependants. Only your spouse (including a de facto partner), children (of any age), someone financially dependent on you or someone with whom you are in an interdependent relationship can receive your super directly.
So, if you want your super to go to someone else, say a sibling, parent, ex-spouse or charity, then you must nominate your LPR and deal with it in your will. So, if you wish to take this path with your super, ensure you have a valid will in place. Unfortunately, far too many Australians do not have a will.
Form of death benefits
Superannuation death benefits must be paid as a lump sum and/or income stream. A death benefit cannot be retained by a beneficiary in accumulation phase.
Only certain dependants can receive a death benefit income stream. They are the same as the above – your spouse, financial dependent and interdependent – but a child must be under 18 years of age, or age 18 but less than 25 and financially dependent on you, or age 18 or more with a disability.
A child receiving a death benefit pension must withdraw it as a tax-free lump sum no later than their 25th birthday, unless they suffer from a disability. Be aware, however, nothing prevents them withdrawing it the moment they turn 18 – maybe not what you have in mind. In this case, directing your super to your estate via your LPR may allow for a testamentary (discretionary) trust to be established, giving you more control in how your super proceeds and other assets are distributed.
You have several options in determining how your super is distributed after your death. You could make a lapsing or non-lapsing binding death benefit nomination (BDBN), a non-binding nomination, a reversionary nomination for an income stream, or for self-managed funds, incorporate your wishes into the fund’s trust deed.
A valid BDBN and/or reversionary pension provide the greatest certainty for where your super will go in the event of death.
Without a valid BDBN – where a nomination has been executed incorrectly or has expired, an invalid beneficiary has been nominated or the fund does not offer BDBNs – trustee discretion applies. In this case, the decision on who gets your super is in the hands of the fund’s trustee. Your nomination in a fund with trustee discretion is purely a guide only.
Is a BDBN essential and if you do not have one, do you need one?
Many people advise that you must have a BDBN to get the outcome you want, but this isn’t necessarily the case. Like many things, it depends on your circumstances.
The appeal of trustee discretion is that your circumstances at date of death are considered, whereas a valid BDBN must be acted upon even if your situation has changed since you made it.
For example, if you are legally married but separated and in a new relationship, a BDBN to your estranged spouse will be acted upon even if you wanted your new spouse to receive your super.
The decision to implement a BDBN should not be automatic but can be critical in many situations. This is especially the case if you’re in a blended family and want your super to go to your children from a previous relationship to the exclusion of your current partner, or to your current partner to the exclusion of your kids because you’ve made alternative provision for them.
You may wish to have a BDBN in favour of your dependant beneficiaries if you are concerned your estate may be challenged and do not want your super to end up part of it and exposed. This may be an important consideration for people in all states and territories other than NSW. In NSW, the concept of notional estates applies – where a deceased’s personal estate, i.e. their actual estate, is extended beyond those assets which are held solely in their own name at date of their death.
With SMSF succession planning, whoever controls your fund after death determines how and to whom benefits are paid. You may wish to have a BDBN for certainty, but even then, you cannot be assured it is enough to ensure your beneficiaries will readily receive your death benefits. While you may have a valid BDBN directing the distribution of your benefits, you need to ensure you have passed control of your fund to a trustworthy person.
If you’re not in a blended family and your circumstances are such that you are in a solid, stable relationship with amicable family relations where your wishes are unlikely to be contested, then you can be fairly certain your super will go to whom you want even without a BDBN.
When commencing a super income stream, e.g. account-based pension, you may nominate a reversionary beneficiary, e.g. your spouse, to automatically continue receiving pension payments on your death – the income stream does not cease when you die. The arrangement is a contract between the fund trustee and you, as member, and is separate to your other superannuation interests which form your death benefits when you die. Accordingly, you do not make a nomination in respect to a reversionary pension as the trustee will continue paying the income stream. Your death benefit nomination is only in respect of accumulation accounts and any non-reversionary pension(s).
If you have made a BDBN which includes and is counter to a reversionary pension, generally the pension will prevail, but it can depend on the governing rules of your fund.
The certainty of a BDBN is attractive, but as good as it sounds, it may lead to unintended consequences if not kept up to date.
Whatever you do, make a valid nomination and don’t leave it to chance!