What happens to your superannuation when you die?

Well, that depends on what has been set up

Superannuation is one of the biggest assets that you will have in your life, alongside your home, so it’s important to set up your superannuation properly.

Superannuation also happens to be the most boring topic of conversation, in which most of us simply tune out.

However, we’ve worked too hard all our lives to simply hand it over to the government after we die.  (**Disclaimer, this traditionally has been a common misnomer, it is your money, and if you haven’t nominated someone, there is a formula for determining who it should go to!)

Sorting out your superannuation is one of the most important tax-effective incentives that you should properly investigate to ensure you are giving yourself (and the loved ones you leave behind) the best use of YOUR money.  It should be a crucial part of your estate planning and there are plenty of tools, resources and people to help you sift through the complexity.  Especially since the superannuation reforms seems to keep changing year after year.

What is the Transfer Balance Cap (TBC)?

The Transfer Balance Cap was introduced on 1st July 2017.  It relates to Australians entering retirement and specifies the limit on the total amount of superannuation that can be transferred into the retirement phase, from an accumulation account into a tax-free retirement account.

Most of us will not need to worry about about the TBC, as it starts at $1.6 million and is indexed in $100,000 increments in line with the CPI.  Although, if your spouse’s superannuation, combined with your own exceeds this amount then you may need to take note.  This could be a concern in the event that one of you passes away.

Who gets my superannuation?

Only your spouse, children, someone financially dependent on you or someone with whom you are in an interdependent relationship can receive your super directly.

Can I nominate someone else to get my super?

Most people are surprised to learn that super is not an estate asset and so is not dealt with via your will, unless you specifically leave it to the executor of your estate, or your Legal Personal Representative (LPR).

When you join a superannuation fund, you usually nominate who you want to leave your superannuation to and in what percentage.  For example, if you don’t have a partner, but you have 3 kids you may want to name them as being entitled to 33% of your total remaining balance.

Only your spouse (including a de facto partner), children, someone financially dependent on you or someone with whom you are in an interdependent relationship can receive your super directly.  In more complex cases, you may nominate someone that your super fund will not be able to pay them directly, as super law dictates eligible beneficiaries, in which case your intended person may miss out completely if you were to die.  Examples could be a sibling, parent, ex-spouse or charity.

Why is Estate Planning so important?

If you want to nominate a person or charity outside the scope of the super laws list of eligible beneficiaries, then you must nominate your Legal Personal Representative (LPR) and deal with it in your will.  The problem here is most people don’t have a will, or fail to make adequate provisions for superannuation within the legal document.  This can be tough for your nominated person/s and cause a lot of stress after you are gone.

You need to be aware that under superannuation law a spouse is someone you live with on a bona fide domestic basis in a relationship as a couple.  There is no time frame, unlike state family provision laws.  So, someone you’ve lived with for only six months could claim your death benefits, which may not have been what you intended.

How is cash distributed?

There are a variety of options in determining how your super is distributed after your death.

1. You could make a binding death benefit nomination (BDBN),
2. a non-binding nomination,
3. a reversionary nomination for an income stream, or
4. for self-managed funds, incorporate your wishes into the fund’s trust deed.

What is a Binding Death Benefit Nomination (BDBN)?

A BDBN gives you greater control about who will receive your super in the event of your death.  Additionally is covers any insurance (“death benefits”) that may also be applicable, which may benefit your recipient.

It is a legal document binding the Trustee to pay your death benefit to your nominated beneficiaries in the proportion that you nominate.

It’s very important if you or your partner has remarried and there are other children involved.

Note that BDBN’s can lapse and may no longer be deemed valid.  Without a valid BDBN, trustee discretion applies. Meaning, the decision on who gets your super will be in the hands of the fund’s trustee.  They may honour your nominations, or it may revert to the disbursement guideline under the Super Law.  Should this happen, the trustee discretion usually considers your circumstances at date of death, whereas a valid BDBN must be acted upon even if your situation has changed since you made it.

An example of this is if you had recently separated from your partner or spouse, but you remain legally married, and now in a new relationship, a Binding Death Benefit Nomination to your former spouse will be acted upon even if you wanted your new spouse to receive your superannuation.

That’s a very good reason to keep your nominations up-to-date to prevent any adverse allocations should you die unexpectantly.

A death benefit is usually paid in the form of a lump sum, but sometimes income streams may be paid to certain dependants as defined under superannuation law.

For a child to receive an income stream they:-

• must be under 18,
• or under 25 and financially dependent,
• or disabled.

It must be cashed out no later than age 25, unless the child has a permanent disability.

What about tax and super?

One key objective when putting together your estate plan should be to minimise tax.  The less tax on your superannuation means more goes to your nominated beneficiaries.

The tax payable on your super depends on whether it goes to a dependant under tax law, and whether it’s received as a lump sum or income stream.

The difference between super law and tax law is that a tax dependant includes a child under 18 only, as well as an ex-spouse.

A death benefit is divided into tax-free and taxable components in the same proportions as your total super interest just before the benefit is paid. As a result, you should carefully consider the division of your super between tax and non-tax dependants.

For lump-sum death benefits, the taxable component is paid tax-free to a tax dependant, such as your spouse. It is taxed at 15 per cent (or 30 per cent from an untaxed fund such as an old government scheme) plus 2 per cent Medicare levy if it is paid to a non-tax dependant, like an adult child.

Super paid to your Legal Personal Representative who is the executor of your estate will be taxed in the same way it would have been had the benefit been paid directly to those benefiting from the estate. However, the estate is not subject to Medicare levy.

Tax on a death benefit pension depends on your age when you die or the age of your beneficiary. If either is aged 60 or more, the pension payments will be tax-free or taxed at marginal rates, less a 10 per cent tax offset if paid from an untaxed fund. Otherwise, the taxable component is taxed at marginal rates and may receive a tax offset.

Lifetime pensions and other “capped defined benefit income streams” are taxed differently.

So folks, make sure that you take the time to review your superannuation and your estate planning. Sometimes it may only require minor adjustments, whereas others need to start afresh due to new living circumstances (such as newly blended families), or old paperwork.  Gain control and you will be helping your loved ones in the future.

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