Most people in Australia badly misunderstand what happens to their superannuation after they die.
The biggest mistake people make in this area, is thinking that they can give their super to whomever they wish outside of their Will.
In fact, federal Australian legislation places substantial restrictions on who can receive your super after you’re gone.
It is so widely misunderstood that even some professional advisers like accountants, financial planners and lawyers (who don’t specialise in estate planning) get confused about superannuation death benefits.
This has led to THOUSANDS of ordinary Australians to wrongly think that because their super fund allowed them to fill-in a form to nominate someone to receive their super upon the member’s death, then this Binding Death Benefit Nomination (BDBN) must be valid.
Sadly, and frustratingly, the test for validity for a BDBN is NOT at the time of nomination, but at the time of death. So the super companies don’t actually check for validity at the time you create it – they only check when you die (and it’s too late to change it!)
So … if you named your kids as a beneficiary, it might have been a valid nomination when you created it, but it could easily have become invalid by the time you die.
ADULT CHILDREN WILL OFTEN MISS OUT.
And if you named a friend or charity, it was NEVER valid – and they will miss out.
Read on to learn how to avoid the most common mistakes.
#1 Compulsory payment of death benefits
Under Australian superannuation laws, once a member of a super fund dies, their superannuation must be paid out of their super as soon as practicable.
Death triggers a compulsory payment situation and therefore the deceased’s superannuation cannot remain in their super and also cannot be added to their beneficiary’s accumulation account.
#2 Who can receive death benefits?
Federal laws allow for payment of superannuation death benefits ONLY to:
- EITHER the deceased’s dependants;
- OR their Legal Personal Representative (LPR). The LPR is NOT their lawyer. The LPR is the Executor of the member’s Will, or the Administrator of their deceased estate.
A death benefit CANNOT be paid directly to a non-dependant from super.
If a non-dependant is to receive the deceased’s superannuation entitlements, then they can ONLY receive the payment via the deceased’s LPR.
This means, a super member can nominate a dependant to receive their superannuation entitlements upon their death, OR they can nominate an LPR to have their superannuation distributed in accordance with their Will to dependants and/or non-dependants.
#3 Dependant under Superannuation & Income Tax Laws
Under Australian federal laws, only certain categories of persons will qualify as a ‘dependant’.
These categories include:
- the deceased member’s spouse or former spouse;
- the deceased member’s child under the age of 18;
- any person with whom the deceased member had an interdependency relationship with before they died;
- or any person who was a dependant of the deceased person just before their death is classified as a “death benefit dependant”.
This means, not all children of a deceased member are classified as a “death benefit dependant”.
An adult child who is eighteen or over and not financially dependent on the deceased prior to their death or, was not in an interdependency relationship with the deceased prior to their death is not a “death benefit dependant”.
An interdependency relationship is a close personal relationship between two people (whether related or not) who live together, where one or both provides financial and domestic support, and care of the other.
An interdependency relationship also exists if two people have a close personal relationship but do not live together due to either or both of them suffering from a physical, intellectual, or psychiatric disability.
If, like many people, you try to split your super death benefits between your spouse and your kids using BDBNs, they are likely to inherit an unholy mess from you, if the kids have become adults by the time you die.
#4 Financial dependant
In order for a child to qualify as a death benefit dependant under the financial dependant grounds, the level of financial support must be significant. The child would need to be financially dependent on the deceased on a regular basis to sustain their standard of living.
The Australian Tax Office position on financial dependency is based on whether if the financial support received by a person was withdrawn would the financially supported person be able to survive on a day-to-day basis.
If the financial support provided, merely supplements the person’s income and represents “quality of life” payments, then it would not be considered substantial support.
What needs to be determined is whether or not the person would be able to meet the person’s daily needs and basic necessities without the additional financial support.
#5 Tax payable on lump sum death benefits
At the beginning of 2019, Australian income tax law provides that if the recipient of a lump sum death benefit is classified as a “death benefit dependant”, then no tax is payable on the lump sum death benefit.
Tax payable on a lump sum death benefit paid to a child who is not classified as “death benefit dependant” is at a maximum of 15% plus the Medicare Levy on the taxed element of the taxable component and a maximum of 30% plus the Medicare Levy on the untaxed element of the taxable component of the lump sum death benefit.
A lump sum death benefit will only include an untaxed element if the super fund has claimed a tax deduction for a life insurance policy taken out on the deceased member.
If no tax deduction has been claimed, then the proceeds of the insurance policy will be treated as a taxed element of the taxable component of the lump sum death benefit.
#6 A Common Scenario
Here’s a common scenario:
- Fred got divorced from Wilma 15 years ago, and later remarried Betty just 3 years ago. He creates Super BDBNs – 50% to his wife Betty, and 25% to each of his 2 kids, Pebbles and Bam-Bam.
- He thinks he doesn’t need a Will, and he thinks he is being clever by creating BDBNs to take care of his kids, while avoiding the costs of making a Will or having to get it Probated after he dies.
- When he dies, neither of his kids qualify as dependant, as they are in their 30s and don’t live with him. They both miss out on Fred’s super, which then passes entirely to Betty as the only valid nominee of the BDBN. Betty also receives all of the jointly-owned assets – simply by right of survivorship. Neither of these categories of assets (the super and the jointly-owned assets) form part of Fred’s deceased estate, and so cannot be challenged by his kids. What little remains in Fred’s estate is the subject of intestacy laws, under which Betty as Fred’s wife gets the lot.
- Even if Pebbles and Bam-Bam were to challenge Fred’s estate, they are very unlikely to be able to attack his super or the jointly-owned assets, and so will end up with nothing – even though Fred had wanted to look after them.
Fred thought he knew what he was doing – but he made catastrophic errors, which only became apparent after he had died and it was too late to fix them.
#7 The 3 Worst Mistakes People Make about Super Death Benefits
- Thinking that they can direct their super death benefits wherever they like without a Will.
- Thinking that adult children will automatically be eligible to receive Super death benefits.
- Not having a well-made and up-to-date Will.
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