Will my super go where I want it to?

No-one likes to think about death but it will eventually come to all of us. For most people, superannuation (boosted by any life insurance payout) is their biggest asset after their family home. Therefore, ensuring that your superannuation benefits those you planned for in the most tax efficient manner is vital.

There is still the common misconception that your superannuation passes directly to your estate on your death and is therefore dealt with under your Will – so if your Will is set then so is your superannuation. However, this is not the case.

Superannuation funds – be they industry, retail or self-managed (SMSF) – are essentially just special types of trusts with the trustees having the control of what happens within. This means that on the death of a member of a superannuation fund it is the trustees who determine where the death benefits of that member are to be paid. The trustees can pay the benefits to any beneficiaries as prescribed by the SIS Act who are called SIS dependants. As your deceased estate or legal personal representative is included in the list of SIS dependants it can act as the means to distribute your superannuation via your Will to those people or entities not specifically included in the SIS definition.

How do trustees decide which beneficiary to pay the death benefit to?

In the case of industry or retail funds where the trustees are not the same people as the members then Death Benefit Nominations (DBNs) are mandatory. For SMSFs, as the trustee and members are the same people and quite often family members, DBNs are not mandatory but definitely best practice. DBNs are made by the members of the fund instructing the trustee which SIS dependant(s) they would like to receive their benefit and can be binding meaning the trustee must follow their direction with no discretion or non-binding meaning that it is more a statement of wishes and there is scope for the trustee to use their discretion. There have been several recent cases challenging the validity of DBNs and therefore it is imperative they are drawn up in accordance with any provisions contained within the trust deed of the fund and also that they are properly executed. Any DBNs also need to fit within your overall estate plan and therefore should be drafted in conjunction with your Will by your estate planning team.

Which beneficiary should I nominate to pay my death benefit to?

On face value it would appear easy to complete these DBNs and in some cases it may be, however, in others there are extra considerations which may influence the final estate plan including superannuation such as tax, blended families and the composition of assets within the estate.

Australia does not have a legislated death tax. However, the taxation of death benefits paid to certain beneficiaries from superannuation funds means that there is in essence a “quasi” death tax paid on some payouts. The taxation legislation has a different definition of what constitutes a dependant and these are known as Tax dependants. How much, if any, death benefit tax is payable on the taxable portion of a death benefit depends on whether the beneficiary is a tax dependant and also in what form the benefits are taken. The tax-free portion of a death benefit is tax-free to any beneficiary in any form. This can be illustrated in the following table:

Type of Dependant	SIS	Tax	Tax on Lump Sum
Spouse	Yes	Yes	0%
Former Spouse	No	Yes	0%
Child Under 18	Yes	Yes	0%
Child age 18 or more	Yes	No	15 – 30%
Person in an Interdependency Relationship	Yes	Yes	0%
“Ordinary meaning” dependant	Yes	Yes	0%
Estate or Legal Personal Representative	Yes	#	#

# For superannuation paid out through the deceased estate the ultimate beneficiary of the superannuation death benefit will be determined and then tax will be payable based on where they fit in the above table.

Death benefit income streams can only be paid to Tax dependants and the tax payable will be determined by reference to the age of the deceased as well as the dependant recipient.

Consideration also needs to be given to the requirement that death benefits are required to be actually cashed and paid out of the fund in most circumstances. If the assets of the SMSF are illiquid and not easily transferable to cash or divisible such as property, especially business premises, then this needs to be considered at the time of making your estate plan to avoid additional costs and transition issues.

Taking the time to get your estate plan right will mean peace of mind for not only you as the member but also reduce the risk that your estate is caught up in costly legal and taxation issues at a time when those you love least need it! Your local Bentleys advisor is well equipped to be an integral part of your estate planning team and help you navigate the complexities of superannuation death benefits.

Checklist

• Locate all your superannuation and review the death benefits including insurance which will be paid out on your death.
• Check any existing DBNs.
• Consult with your Estate Planning Team (Team) – your Bentleys adviser as well as your Legal Representative – as to the most tax effective and equitable method of distributing your death benefit.
• Provide your Team with a copy of the current trust deed of your SMSF or the DBNs form provided by your retail/industry fund to enable the drafting of your DBNs.
• Review any completed DBNs to ensure they are properly executed.
• Once your plan is in place, continued monitoring is required to ensure that it remains relevant given changes in your family and situation.

This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter.  Bentleys (Australia) Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based on their own personal circumstances.  Although we consider the sources for this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission.