Securing your child’s future (Part 3 of 4): Treatment of Super Death Benefits on death

Super is not technically owned by the person who contributed it (or whose employer contributed it on their behalf), it is required by law (to be eligible as a super fund) that super contributions are held on a member’s behalf by the trustee of a given super fund.

Whilst your Will may be able to deal with everything you own in your own name when you die, if a super fund holds assets for you as a member of that fund, when you die it is typically the trustee of the super fund, not you or anyone in your family, who has the power to decide what will happen to your super death benefits (including any life insurance in your super). Your Will can only influence how the proceeds of your super are paid if your super fund trustee first elects to pay your super death benefits to your Legal Personal Representative (the Executor of your estate), but they may just as plausibly instead elect to pay those benefits directly to your spouse, child or a person with whom you have an interdependency relationship. If they do any of the latter, your family member’s options to challenge the decision are extremely limited:- all they often have scope to do is to ask the trustee to reconsider their decision (in the jurisdiction of the Australian Financial Complaints Authority, or previously the former Superannuation Complaints Tribunal), but if the trustee makes the same decision again there is usually little or no further recourse.

The Superannuation Legislation Amendment Act 1990 (Commonwealth) allowed super funds to offer their members the opportunity to make a Binding Death Benefit Nomination. Such Binding Death Benefit Nominations are typically only binding for a period of three years from when they are made, and the nominated beneficiary must either be your Legal Personal Representative (the Executor of your estate), or a dependent of yours at the time of your death. Most funds also permit non-binding nominations (and in fact many people make non-binding nominations not realising that their super fund has no obligation to do what is asked) that you can make indicating who you would prefer to receive your death benefits, however as the name usually indicates such nominations are not at all binding on the trustee of the super fund, and where the super fund trustee decides to pay those benefits differently to what was requested, this often disrupts your overall plan for how your estate and super would be distributed, and the result is usually one of the following:

• at best, that your family must agree to some varied distribution of your estate (which usually carries a cost burden and delay factor for your estate), or
• at worst, an irreconcilable dispute and resulting estrangement/s within your family.

Many people also nominate persons who aren’t eligible to be paid their super, such as a sibling or parents whom they don’t live with. The effect of this is akin to asking the super fund trustee to decide who your super death benefits are paid to in their full discretion.

Without a binding nomination in place, the trustee of your superannuation fund may delay the payment of any of your death benefits until such time as they have made a decision as to who it should be paid to, and there is no guarantee that they always get this right. If your superannuation fund does not pay this out to an appropriate dependant then a complaint will need to be made to the Australian Financial Complaints Authority, and that process can take months to reach an outcome.

To ensure that the trustee of your superannuation fund does not make the wrong decision and to avoid any delays in having such death benefit paid to your beneficiary, it is strongly recommended that you have a binding death benefit nomination in place, and have some process in place to ensure you review, renew and maintain an appropriate nomination on a reasonably regular basis.

Another little known or poorly understood aspect is that super death benefits are often subject to super death benefits tax upon death, if paid to persons who are not tax dependants of yours [as defined in section 302-195 of the Income Tax Assessment Act 1997 (Commonwealth)]. If you leave behind more than one tax dependant spouse and/or child after you die there are other optional mechanisms (commonly known as Super Proceeds Trusts) that a specialist Estate Planning lawyer can implement within your Will that can provide your Executors better flexibility to minimise the impact of this super death benefits tax, by quarantining your super proceeds in a tailored trust for the potential benefit of qualifying tax dependants only.

We are here to help

Our friendly and professional Wills and Estate Planning specialists can provide you with peace of mind, and ensure that the future of your family is secured against the risks of any death or loss of capacity, by discussing and assisting you to prepare and implement a practical and comprehensive Will and other complementary Estate Planning documents.

For more specific information on any of the material contained in this article please contact Nick Muirhead on +61 8 8210 1220 or nmuirhead@normans.com.au or Stefanie Magliani on +61 8 8217 1373 or smagliani@normans.com.au.