It is important to understand the interplay of the laws governing superannuation, tax and succession when planning your estate.
Appreciating how these laws interact can help avoid some common pitfalls in estate planning and may have a significant impact on the net (after-tax) proceeds received by your beneficiaries.
When we refer to ‘death benefits’ we generally mean the aggregate of a deceased person’s superannuation account and the proceeds of any life insurance policies held in superannuation.
These funds are treated in a specific manner after a person dies.
Who gets my superannuation when I die?
Superannuation benefits may not automatically form part of a deceased person’s estate. The common misconception that they do, can have unintended consequences.
The Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) governs superannuation funds and provides that a fund can only directly pay a death benefit to a dependant of the fund member or otherwise, to the estate.
A ‘dependant’ under superannuation laws includes a spouse (including a de facto partner of same or opposite sex), a person with whom the fund member had an interdependency relationship, a child of any age or a person who is financially dependent on the member. A child includes a biological child, adopted child, step child and ex-nuptial child.
An interdependent relationship is one where two persons live together and are in a close personal relationship and one or both provide financial, personal and / or domestic support to the other. This definition encompasses relationships that may not otherwise fit within the narrower definition of dependant such as a parent-child or sibling relationship.
The importance of a Binding Death Benefit Nomination
A Binding Death Benefit Nomination (BDBN) completed by the fund member compels the trustee of a superannuation fund to pay death benefits to a deceased member’s nominated dependant or to his or her estate. Only if the funds are nominated to be paid into the estate, can they be distributed according to the deceased person’s Will.
Completing a valid BDBN is an important step in estate planning. If no BDBN exists then the trustee of the superannuation fund will have discretion in paying the death benefits to a dependant or to the estate. The trustee will consider the relationship of the fund member and the proposed beneficiary and his or her (or their) financial needs. The following example demonstrates the importance of a BDBN.
A person may make a Will leaving his or her entire estate to a certain beneficiary, mistakenly thinking that the estate will automatically include the value of death benefits.
If no BDBN is in place, the trustee of the superannuation fund will have discretion to pay the benefits to an SIS-defined dependant who may not be the same person as the one intended to benefit under the Will.
Alternatively, a BDBN may be in place that directs the fund to pay benefits to a different person (an SIS-defined dependant). In this case, where there is an inconsistency between the BDBN and the terms of the deceased’s Will, then the BDBN will prevail and reduce the gift provided in the Will to the extent of the death benefits payable.
Either way, the result can lead to very different and unintended outcomes than intended by the Will-maker.
Death benefits and tax
When planning your estate, it is also important to understand the tax implications on the payment of death benefits to your beneficiaries.
The Income Tax Assessment Act 1997 (Cth) which governs the payment of tax, defines the term ‘dependant’ differently than the SIS Act. A dependant under taxation law does not include financially independent adult children. This means that although adult children can receive death benefits directly from a superannuation fund (as a SIS-defined dependant), they will need to pay tax on the taxable portion of those funds. Similarly, a recipient of death benefits (from funds directed to the estate via a BDBN) who is neither an SIS-defined dependant nor a dependant for tax purposes, will be taxed.
Conversely, tax-dependant beneficiaries (a spouse or dependent child under 18 years) will generally receive death benefits tax free.
This is an important consideration in estate planning and guidance by a financial professional and lawyer can make a significant difference to the net proceeds received by your loved ones after you die.
Disputes over death benefits
A person who believes death benefits have been wrongfully paid, and that he or she has an entitlement to the funds, may apply for an internal review by the deceased member’s superannuation fund within 28 days of being notified of the decision.
An aggrieved person will need to set out the reasons for the claim and provide supporting evidence of his or her relationship with the deceased.
If not satisfied with the decision reached by the internal review, the person will have a further 28 days after notification of that decision, to lodge a complaint with the Australian Financial Complaints Authority (AFCA). The AFCA will only review complaints concerning regulated funds (i.e. not self-managed superannuation funds).
Legal advice and guidance is recommended when challenging the payment of death benefits.
Key points
- It is important to consider the way death benefits are treated when a fund member dies, and to plan your estate accordingly.
- Superannuation funds are legally required to pay death benefits directly to an SIS-defined dependant or in the absence of such a dependant, to the estate.
- A valid BDBN nominating a dependant beneficiary or your estate will circumvent the superannuation fund’s discretion and ensure your intended beneficiaries receive these payments.
- The tax consequences on death benefits will vary depending on your nominated beneficiaries. Assets from your estate can be distributed in ways that may result in better taxation outcomes for the recipients – good estate planning advice can help maximise the overall benefits received by your beneficiaries.
- In some circumstances, the payment of death benefits to a certain beneficiary may be challenged. An estate planning lawyer can help with strategies to reduce the potential for future family provision claims.
Conclusion
Understanding the way superannuation death benefits are treated when a person dies is an important step in estate planning, particularly when these funds comprise a large portion of your estate.
This information is for general purposes only and you should obtain professional advice that is tailored to your individual circumstances.
If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected].