As we approach our golden years, it becomes increasingly crucial to ensure our hard-earned assets are protected and distributed according to our wishes after we pass away.
Estate planning plays a pivotal role in achieving this, and it’s essential to understand why superannuation does not automatically form part of a deceased estate in Australia.
In this article, we’ll delve into the reasons behind this exclusion, provide practical advice, and empower you to take charge of your estate planning.
The Nature of Superannuation
Superannuation is a retirement fund unique to Australia that operates under specific federal legislation.
It is designed to support individuals during retirement, ensuring financial security beyond their working years.
Given this specific purpose, superannuation is not (at present) well-designed as a mechanism to pass wealth from one generation to another.
The regulations regarding distribution after death are complex and not at all intuitive.
The Trustee’s Role
In Australia, all superannuation funds are trusts. This is why they call you a ‘member’ rather than an ‘owner’.
Superannuation funds are governed by trustees who manage and administer the fund on behalf of the members.
These trustees hold a fiduciary duty to act in the best interest of the fund’s beneficiaries.
As such, they follow a predetermined process for the distribution of superannuation benefits, which often involves bypassing the deceased estate altogether.
Most ordinary Australians are gobsmacked to discover that their super does not automatically form part of their deceased estate, and that their Last Will and Testament might not be able to deal with this asset.
Death Benefit Nominations
To exert more control over the distribution of your superannuation benefits, it’s important to consider a death benefit nomination for your super.
This is a form that you as member of the super fund complete, to direct the trustee where to pay the death benefit of your super after your death.
Remember that the death benefit could be more than the saved/invested component of your super, if you have life insurance as part of your super.
Here there be Dragons
Be VERY cautious about creating a death benefit nomination on your super.
This is because there are two huge pieces of federal legislation that deal with this area of law, and there are strict rules about who can receive your super after you die.
It is not like your Will where you can nominate whomever you want. For super, only specific categories of people can be a valid nominee (typically spouse, children and people financially dependent upon you).
Your Legal Personal Representative (ie the executor of your Will) can be a valid nominee for most – but not all – super funds.
However friends, charities and companies will never be valid nominees. However the tax treatment for these nominees will vary, and the age of your kids when you die is a relevant factor.
The big gotcha in all this, is that your death benefit nomination will only be tested for validity when you die, and then it will be too late for you or your family to fix the problem.
In other words, you might innocently create a death benefit nomination form, believing that your instructions will be carried out after your death, only for your family to discover after your death that your nomination is invalid.
Your super fund will not advise you upon the validity of your nominations at the time you make them, so you could be lulled into a false sense of confidence.
4 different types of death benefit nominations
In Australian superannuation there are binding and non-binding nominations, and there are lapsing and non-lapsing nominations.
Super funds differ as to what types of nominations they will accept. Very few funds offer all options.
A binding nomination directs the trustee to distribute your superannuation assets to specified beneficiaries, while a non-binding nomination serves as a recommendation that the trustee may consider but isn’t obligated to follow.
For those funds that permit binding nominations, almost all of them will be lapsing, meaning that they will only remain valid for a set period of time (typically 3 years), and then they will lapse.
This is a real problem, because the fund does not have to remind you when your nomination has lapsed, and most do not.
Therefore you have to remember to renew your nomination yourself or risk it being invalid when you die.
This is particularly problematic where so many older Australians suffer health conditions which adversely affect their mental capacity as they age (Alzheimer’s, senility, dementia, stroke etc).
If you lose your capacity, you won’t be able to create or renew your super death benefit nominations, and they will then lapse.
Understanding and utilising these nomination options can help ensure your superannuation benefits align with your intended wishes.
Taxation Considerations
Superannuation benefits, when paid to dependents or legal personal representatives, may be subject to taxation. However, tax concessions and exemptions exist for beneficiaries who meet certain criteria.
It is important to seek professional advice and understand the potential tax implications associated with superannuation distribution, both for the sake of your beneficiaries and your overall estate planning strategy.
Other super considerations
Some people create their own ‘self managed superannuation funds’. These have their own special rules, and require specialist advice.
Some super funds permit an pension-style of retirement plan, called an annuity. This provides an income-stream during the life of the member, but typically does not have a lump-sum benefit payable as a death benefit.
Some pension/annuities permit ‘reversionary pensions’ where the spouse of the member can receive some or all of the remaining pension as an income stream for the spouse.
The Importance of Estate Planning
Considering that superannuation might not form part of a deceased estate, it becomes imperative to engage in comprehensive specialist estate planning.
By crafting a well-thought-out estate plan, you can establish trusts, make specific bequests, and ensure that all your assets, including superannuation, are distributed according to your wishes.
Consulting an experienced lawyer who specialises in estate planning will help you navigate the complexities and achieve your desired outcomes. This is not a DIY job!
Conclusion
In summary, superannuation in Australia doesn’t automatically form part of a deceased estate due to its unique nature, governance by trustees, and separate regulations.
Taking specialist estate planning advice empowers you to take control of your estate planning and secure the financial future of your loved ones.
By carefully selecting and implementing the correct nominations, considering tax implications, and embracing comprehensive estate planning, you can maximise the distribution of your assets. Take charge today, and secure your legacy for tomorrow.
Contact the oldest law firm in South Australia – Genders and Partners, established 1848, to learn more about superannuation, estate-planning and estate-administration solutions, by visiting our website today and schedule a free no obligation telephone consultation to find out how we can help you and yours.
If you would like to read further:
- https://www.genders.com.au/death-benefits-who-benefits-do-you-know-who-will-receive-the-benefits-from-your-life-insurance-policy-and-superannuation-fund/
- https://www.genders.com.au/essential-guide-to-super-death-benefits/
- https://www.genders.com.au/superannuation-death-benefits-be-warned/
This article should serve as a strong warning that a Will alone is not the only document you need for an estate plan.
Without a death benefit nomination, Advance Care Directive, power of attorney, trust, or guardianship you may not be providing for your family as you intend.
Remember – any mistakes you make in your death benefit nomination or your Will won’t become apparent until after you’re dead, and it’s too late for you to fix them.
It is also vitally important that you keep your Will and estate plan up to date – it is not a set-and-forget exercise.
To learn how to protect yourself, your family and your assets, by creating a professionally-made estate plan, claim your FREE 15 minute Telephone Consultation
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