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Superannuation and Your Will

on Monday, 12 May 2014.

Superannuation and Your Will

In Australia, every person who works (or who has worked) will be a member of a superannuation fund. In some cases the superannuation fund could be worth a great deal. In every case, it is important to make plans to distribute the balance of the fund, if any, upon death.

Most people seem to assume that the proceeds of superannuation will automatically form part of their estate and will be dealt with by their Wills after death.

This is not in fact the case.

 

Superannuation monies are not directly held by an individual and do not form part of that person’s estate. This means that superannuation cannot be dealt with by Will.

A superannuation fund is held by the superannuation fund trustees on behalf of the member. On the death of the member, the trustees under the deed creating the superannuation fund have a right to determine how the monies will be dealt with.

In the case of a self-managed superannuation fund, upon the death of the member, some other person will take the member’s place as trustee of the fund. Usually that person will be the legal personal representative of the deceased (executor) or possibly may be a person nominated in the trust deed.

In the event that the deceased member does not have a Will, the person taking over will usually be a family member who will step in to take responsibility or, in the alternative, the public trustee.

The question becomes how will the replacement trustee deal with the superannuation money? The contributor is no longer around to give directions – so how woill decisions be made?

This is where some form of advance planning is required if the member wants to have his or her money dealt with fairly and with the most appropriate outcomes for the persons left behind.

The Trust Deed

The starting point for the trustee is to review the rules set out in the trust deed. For example, the deed may specify that all death benefit payments are to be paid as a lump sum to the estate. In the alternative, it may limit the payment of death benefits to certain potential beneficiaries.

Pensions

If the deceased member was receiving a pension from the fund, he or she may have specified some dependents to be “reversionary beneficiaries” – that is, the pension continues to be paid but to the specified dependents.

This specification or direction is binding on the trustee and cannot be changed unless the pension is stopped and a new pension is commenced. It takes precedence over any other nominations.

If it is not a reversionary pension, the trustee will terminate the pension and deal with the underlying assets in accordance with the trust deed and any nominations.

Nominated Beneficiaries

If the trust deed allows for binding death benefit nominations, as most up to date trust deed would, the next step is to determine whether the deceased member had signed a Binding Nomination or a Non-Binding Nomination as part of the superannuation fund documentation. The trustee will have to follow the binding nominations, but not necessarily the Non-Binding Nominations. The difference between these is explained below.

Warning

If there are no nominations, the trustee will do as the trustee considers fit. This could be very difficult if there are competing claims by family members or ex-spouses for part of the superannuation balance.

Binding Nominations

In 1999 the law was changed to allow for the creation of Binding Nominations, whereby a member of a superannuation fund can direct exactly how their superannuation balance is to be dealt with. Unless void for technical reasons, the trustees are bound to follow those directions.

While it sounds like a good idea to have binding nominations, they do require careful management. For example, they have a life of 3 years, after which they expire. Family situations can change, and if a member forgets about his binding nomination, his superannuation money could go to someone that with whom he is no longer on good terms.

Alternatively, a financially dependant child may become not financially dependant, meaning that instead of paying no tax on their inheritance, they may have to pay 15% tax on the amount received.

To be valid, these nominations must be independently witnessed when signed, and must be correct – that is, the total distribution must add up to 100%.

Non-Binding Nominations

Non-binding nominations are non-binding on the trustee, but offer greater flexibility to the trustee to determine what is the best method of distributing the funds at that given time, including the most tax effective means of dealing with the money.

It is important in the case of a non-binding nomination that the member trust the trustee to do the right thing in relation to beneficiaries or potential beneficiaries.

Non-binding nominations do not expire – but should be reviewed on a regular basis.

No Nominations

Not having any nominations is of course very flexible, but could cause problems for the family and the trustee once the member is gone, especially if there are competing beneficiaries.

Nominations by way of Deed

A death benefit nomination can also be written into the Trust Deed. In many ways this is similar to binding nomination, but it does not expire every three years. It is however more expensive to change as it would require an update of the deed if ever you chose to update the nomination.

To Whom Can I Leave my Super?

You are restricted as to who you can nominate to receive your super. The rules are set out in the Superannuation Industry Supervision Act (known as the SIS Act).

Valid nominations are to the following categories:

  • Spouse (current or de facto)
  • Children
  • Executor of the Will
  • Administrator of the estate
  • Any other person financially dependant on the member
  • Any other person with whom the member has an interdependency relationship

Can I Leave Super to My Estate?

A member may leave his superannuation to his estate. It will then be dealt with as determined by his Will.

This must be a conscious decision however – the default position is that it does not go to the members estate. There will potentially be significantly different tax outcomes by leaving super to an estate compared to leaving or dealing with it from within the super fund, so careful consideration should be given to this option.

How Will the Benefit Be Paid?

The trustee may have the option of paying out the death benefit as a pension, or as a lump sum, or as a combination of both to different beneficiaries.

Nevertheless a pension cannot be paid to a non-tax dependant.

What About Tax?

If when you die you still have super left to distribute, then whether or not any tax is paid by the recipient will depend on their age, and also on your age at the time of death. It will also depend on whether or not they are a dependant for tax purposes.

Conclusion

You do not own your superannuation fund.

The fund cannot be dealt with by Will unless pursuant to the Deed creating the fund, you have nominated your estate to receive the proceeds.

To do so however will have taxation implications upon which you should be advised by your accountant.

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