Passing on super requires the same care as making a will
The key objective of estate planning is to ensure that the right people get your assets after you pass away. Traditionally this was done via a will. It is now common for a third or more of a family’s wealth to be in superannuation, however. Superannuation is not automatically covered by your will.
Many people see a will as a separate exercise from deciding what happens to their super after their death, and take far more care over the former than the latter. People are often unaware that they have made, or should make, a super death benefit nomination (DBN) directing their super fund how to pay their super after their death.
When you set up, or join, a super fund, one of the many forms you complete is often a DBN that says in effect only: “My spouse gets my super when I die” – the most basic kind of DBN available. That’s it? What happens if, for example:
- your spouse does not survive you,
- a child has special needs, is not responsible with money or has large debts,
- a child does not survive you, leaving children of their own,
- you want to leave out a child due to their bad behaviour towards you, or
- you divorce or separate before you make a new DBN?
Most people provide for these possibilities their will (or the law covers them automatically) yet they commonly overlook them when deciding what happens to their super after their death. And, to be fair, many public and industry super funds did not make it easy for people to include flexibility in the via DBNs.
As you can see, passing on your assets outside of super, and your super, should logically both be addressed as part of the same exercise.
Dealing with super in your will
In many cases it will not in fact be appropriate to deal with your super under your will. In some cases it may be better for your surviving spouse, and/or minor children, to receive your death benefits via a pension, bypassing your will entirely. This is best achieved by making a binding death benefit nomination specifying that this should occur. Even though your super will pass on outside your will in this case, it is still important to consider who will get what, and in which scenarios, in the same way as you would when making a will.
In some cases, however, a death benefit pension will not be appropriate, or may not even be be allowed by the law. For example, if you are the surviving member of a couple and your children are over 25, you may leave in superannuation only as a lump sum (except in the case where they are seriously disabled). In such cases it is normally preferable to deal with superannuation under your will.
A well-drafted will should specify how super death benefits will be divided up if they are paid to your executor. This, of itself, does not guarantee that your super will be dealt with under your will. This kind of will clause only works if you also make a binding DBN requiring your super fund trustee to pay your super to your executor on your death. (If you have not given a binding DBN your super trustee may still decide to pay your death benefits in this way, but there is no guarantee that it will do so.)
A correctly drawn, binding DBN will ensure that your death benefits are dealt with in the best way from among the above alternatives, depending on which scenario occurs. A proper DBN may, for example, specify that if your spouse survives they receive a pension, but if you are survived only by adult children your super goes to the executor of your will. Your will may then divide that superannuation up in the same way as for the other assets in your estate.
Taxation of super death benefits
Non-superannuation assets are inherited tax-free (although they may be subject to capital gains tax on eventual sale). Super death benefits, however, may or may not be taxed when received by your beneficiaries, depending on their ages and relationships to you.
Super death benefits receive more favourable tax treatment (which can be a nil tax rate) if they are paid to a “Dependant” (as defined in the Income Tax Assessment Act 1997) depending on their age. A Dependant, in this sense, is a surviving spouse, a child under 18, a child over 18 who was financially dependent on you, or a person with whom you were in an “inter-dependency” relationship.
In some cases these differences may mean that, to minimise the overall tax burden on your beneficiaries, you should give a Dependant all (or more) of their inheritance by way of a super death benefit and none (or less) of your non-super assets, and vice versa for a non-Dependant beneficiary. Your loved ones can still receive the same amount each in dollar terms, but the source of their shares (from out of super and non-super assets) may be different.
Some super funds limit DBN choice
Some public and industry super funds only allow non-binding DBNs. These guide the super fund how to pay your death benefits but, as the name suggests, the fund is not legally bound to follow them. Other public or industry funds permit binding DBNs, however these must be renewed every three years by law, otherwise they become non-binding.
Further, many super funds deny members the ability to make a DBN which provides for various alternative scenarios which may occur. This will require you to keep your DBN under more frequent review, to ensure it is updated to address any changes in your family circumstances. A will, however, can predict and deal with a greater range of common possibilities in advance, although these too require periodic review.
A Self-Managed Super Fund (SMSF) gives you maximum freedom to make the kind of DBN that is best for your circumstances. If your SMSF deed is worded correctly (and it can usually be amended if it isn’t) you can make a binding DBN which only expires if you change it, giving you the same flexibility to deal with super as you have when leaving assets under a will.
In certain cases (e.g. you wish to disinherit a child, or implement a detailed estate-planning strategy) and you have a public super fund which does not allow binding DBNs, you may need to move your super to an SMSF to eliminate the chances of an undeserving beneficiary convincing the trustee to grant them a share, or the risk of your wishes are otherwise not properly carried out.
As death benefits are a complex area, you should work with your financial planner and your lawyer together to ensure that you get the best advice, and you have a consistent estate plan for all your asset classes, and that it is documented correctly.