How superannuation death benefits work

Now it’s 2020 and we’ve evolved beyond such medieval rules and as we contend with contemporary asset structures like superannuation, and family structures grow more diverse and complex, estate planning has never been so essential. However, not everyone may follow your wishes upon your death, and just because you wish something doesn’t mean it’s legally valid.

So, what do you need to know about estate planning when it comes to superannuation? Let’s dive deep into the topic. 

Where does planning to pass on your super after your death start?

To get your house in order, you need to know what’s in your house. There’s a reason super is an expertise all on its own - it is one of the most misunderstood aspects of preparing an estate.

A lot of people assume that your super fund will be dealt with according to your will, but they are two separate areas of law - just because you have a will, and it’s enforceable, doesn’t mean it will extend to your superannuation. This is because super isn’t an estate asset - it’s held in a separate trust structure and does not automatically form part of the estate upon death.

As a consequence, you may need to provide quite separate instructions as to what is to happen to money inside your superannuation trust in the event of your passing. Indeed, unless you leave specific instructions, it is the trustee who determines how to deal with your death benefit, the same as your legal representative will deal with the remainder of your estate. They may not be the same person, and they may not agree.

 What are the different types of super funds?

There are many different options - from self-managed super funds (SMSF) to corporate funds, industry funds, government employee super funds, and so on. As far as estate planning is concerned there’s not a huge amount of difference between them; essentially, the rules are generally the same across all types of super funds. 

Can you nominate anyone as your beneficiary?

No. What a lot of people think is that they can write a death nomination in favour of their parents, which is actually not allowed under the rules - it has to go to a spouse or a dependent, as we discuss later in this article.

So, how do we ensure that our nominating beneficiaries receive our superannuation benefits?

You must make sure all the paperwork is in place, and ensure it has been ‘road tested’ (which we will expand on below).

From a paperwork standpoint, it is advisable to talk to your beneficiaries while you are alive to let them know what your intentions are in the event of your passing. While you may be worried it will cause a fight, it’s better to have that fight now while you are around to arbitrate.

Expanding on that point, you may feel while reading this that your family is close-knit and would never fight over your assets, however experience has told us that sometimes arguments do occur after somebody’s passing, no matter how close the family was beforehand. We don’t always want to believe it, but sometimes money can change people, and it doesn’t have to be large sums, either. So, whether you are close with your family or not, you must plan as though an argument could break out so that you have prepared and ruled on the matter before it becomes a problem.

How do you ‘road test’ an estate plan?

Road testing is the act of predicting and planning for potential future scenarios that might cause drama after your passing. It involves asking yourself tough questions, questions that might even seem inconceivable right now - what happens if one of your children decides to leave the family? Who would have predicted, five years ago that Prince Harry would leave the Royal family? How would that scenario play out in your family? Who and what does it impact? Does it impact your estate plan? Would you have to sit down and reformulate the structure?

Chances are, the answer is ‘yes’ to that final question.

Run through as many of these scenarios you can think of - people fighting, breaking apart, even manipulating each other - and consider how your estate plan holds up in each case, and what you can do about it. Again, having these fights before your passing is one way to rule on them before you are gone.

What SMSF structures are the most appropriate for ensuring control of the outcomes after death?

Zooming in on SMSFs in particular, given that this is a fund type that you would help set up yourself, it’s highly important that you understand how to do so to prepare for your future passing.

Generally, it’s important to have a corporate trustee rather than just individuals. Corporate trustees can provide ease of administration and paperwork, particularly in the event of a trustee’s passing. You see, in an SMSF all of the superfund assets are held in the name of the trustees, so on the death of one of those individuals there’s a lot of work to be done, from an administrative point of view, just to get assets into the right names. Alternatively, if you elect a corporate trustee then it’s in the name of the company and it’s only the directors behind the scenes who change.

This may seem like a trivial point when planning your estate, especially if you’re close with your family and trust them implicitly. However, it’s a time-consuming process and if you’re relying on others to assist you (e.g. with the legal side of things), then it’s a costly process too.

In short: a corporate trustee is more enduring than individual trustees, because it doesn’t change when members or directors pass away.

What are the income tax consequences of superannuation death benefits and can this be managed?

Yes, it can be managed.

It depends on a lot of things, like who the benefit is being paid to, and also the components of the death benefit itself. Sometimes getting the right outcome from an estate point of view causes tax consequences and then other times, if you’re trying to manage the tax consequences, you may not get the estate outcome you’re looking for.

Mainly, you need to distinguish between a tax dependent and a non-tax dependent - a piece of income tax law that can get tricky.

• Who are tax dependents? A spouse, or a child under the age of 18, a child with a disability, someone in a ‘financial dependency’ relationship, or someone in an interdependency relationship. Benefits paid to tax dependents will generally be paid to them without income tax consequences.
• Who are non-tax dependents? Everyone else, for example adult children. Benefits paid to non-tax dependents may have income tax consequences.

What is the Transfer Balance Cap?

The Superannuation Transfer Balance Cap (TBC) became effective on 1 July 2017 and was introduced to set a limit on how much money from superannuation accumulation phase can be transferred into the retirement phase. The cap is currently $1.6 million.

The TBC and how it applies to individual circumstances is complex and may impact upon your estate planning decisions with respect to your superannuation benefits.

What are some of the common traps people fall into?

Paperwork

Paperwork makes up some of the biggest pitfalls people stumble into while estate planning. Either their instructions aren’t clear, they have not been updated/reviewed regularly, or the instructions have not been drafted in accordance with the trust deed or the rules that exist.

Here’s an important piece of advice - don’t set and forget your estate plan. For example, right now you may prepare a death benefit nomination to leave your super to your four children, all of whom are minors (and, thus, tax dependents). However, if you pass away in 10 or 20 years, those children will no longer be minors and your superannuation death benefit no longer eligible.

Know the rules

One reason that we advocate for people to have all of these sometimes-difficult discussions beforehand is that super and tax laws don’t always seem like common sense - they may not work the way you feel they should. And if you don’t understand how something is going to work after your passing, your estate plan may not go ahead as intended and this could cause conflict in your family.

By having these conversations now, and seeking the help from an expert, you will be able to work out what you do and don’t know, and plan for it in advance.

Talk to a specialist

Back in the old days, most people would assume that they need a lawyer to sort out their estate, but with super in the picture you also need an accountant who specialises in this area. By bringing all of the experts together from the outset, they can help you ask the right questions and ensure you don’t overlook anything important, which will save a lot of pain and headache for your family later on.

In summary

Just because you stipulate that you want your super to pass to your relatives does not mean that it can - there are many complexities in Australian super law that must be taken into account, and some of these may prevent your wishes being carried out the way you intend.

Talk to your family now to ensure that they understand your intentions, bring in a specialist to help you ensure your estate is structured legally and the way you want, and ensure you regularly review and if necessary, update your will and superannuation death benefit nomination as the years pass and your personal circumstances change. 

Shirley Schaefer, partner, superannuation, and Paul Rafton, national leader, superannuation, BDO