Your super isn’t automatically included in your Will, unless you’ve given certain instructions to your super fund first.
Deciding who gets your super when you die isn’t as simple as having a Will.
That’s because Wills typically only cover assets you own personally, such as houses, cars, investments, jewellery and other personal items, whereas super is held in a trust for you by the trustee of your superfund.
To make sure your super and any life insurance you might hold with it goes to the people you’d like it to, you need to keep your super fund up to date by nominating a valid beneficiary.
If you don’t nominate a beneficiary, your super fund may decide who receives your super money, regardless of what you have in your Will.
Who can I nominate as my super beneficiary?
If you pass away, your super fund must pay a death benefit to your eligible super beneficiaries who can include:
- your current spouse or partner;
- your children (of any age);
- someone who is in an interdependent relationship with you;
- anybody financially dependent on you when you die;
- your estate or legal personal representative.
If you nominate your estate or legal personal representative, you must then specify in your will how and who you want to distribute your super money to, which can include eligible beneficiaries (mentioned above), as well as any other people in your life.
It’s important that the directions stated in your Will are up to date, so your legal representative pays out your super money as per your wishes.
How do I nominate a beneficiary?
When it comes to specifying your beneficiaries, most super funds will give you several options.
These options are important to understand, particularly given that the type of nomination you choose could give you greater control over how your super benefits are distributed.
There are lapsing and non-lapsing binding nominations. Lapsing nominations typically expire after three years unless you renew them, while non-lapsing nominations may never expire.
If you choose a non-lapsing binding nomination, it’s important to remember to make changes should your circumstances change, otherwise the super trustee is bound to follow the instructions provided in your nomination.
In this scenario, the trustee of your super fund will consider your nomination but will have the final say as to who receives your super benefits.
They will attempt to find all potential beneficiaries and decide who is the most appropriate recipient.
Depending on the super fund, if you don’t make a nomination the trustee will pay your death benefit to your estate or use its discretion to determine which eligible beneficiaries the money should go to.
Note, they might not choose to distribute the payments the way you’d like, which is why nominating a beneficiary could be a good idea.
When your super is in pension phase
If your super is already in pension phase, then all of the above, plus additional options, may be available and should be considered.
Will the money be taxed when it’s distributed?
Different tax treatment can apply depending on whether your super is paid as a lump sum, income stream or mixture of both, and if your beneficiary or beneficiaries are classified as ‘tax dependants’.
A tax dependant includes:
- a current spouse, including defactos;
- any children of the deceased who are under the age of 18;
- any other financial dependants.
Paying super death benefits as a lump sum
Lump-sum super death benefits paid to tax dependants directly, or via your personal legal representative, are not taxed, whereas super benefits paid to non-tax dependants may be.
For non-tax dependants, tax will only be payable on any taxable component of the lump-sum super benefit, which may include both a taxed and/or untaxed element.
The taxed element is currently subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element is subject to a maximum tax rate of 30% plus the Medicare levy.
Note, an untaxed element will typically only arise where the death benefit includes proceeds from a life insurance policy held by the fund, or where the death benefit is being paid from an untaxed super fund, for example certain government sector super funds.
Paying super death benefits as an income stream
Where the death benefit is paid in the form of an income stream, the tax treatment depends on the age you pass-away and/or the age of the beneficiary, as well as the underlying tax components of the income stream.
If super is paid from a taxed super (and you or the recipient are aged 60 or over at the time of your passing) it will likely be paid tax-free.
If you’re both under age 60 at the time of your passing, the taxable portion of income stream payments will be counted as assessable income for your beneficiary, but they’ll be entitled to a tax offset equal to 15% of this amount. When your beneficiary turns 60, the income stream will become tax free.
If the death benefit pension, however, is paid from an untaxed fund, the taxable portion of pension payments received by a beneficiary under age 60 (where you’re also under age 60 at the time of your death) will be taxed at the beneficiary’s maximum tax rate, with no tax offset.
If you or your beneficiary are over age 60 at the time of death, the taxable portion of pension payments will be eligible for a 10% tax offset.
Other things worth noting
Children over the age of 25 (other than those with a permanent disability) can’t receive super death benefits as an income stream.
If they do receive a death benefit pension from an earlier age, they’ll typically need to cash it as a lump sum by the time they turn 25.
Meanwhile, changes to the super rules may further restrict your ability to pay a death benefit pension to your beneficiaries, as a result of the pension transfer balance cap.
This cap broadly limits the amount that can be transferred from super into pension phase.
What can I do now?
Here’s a quick checklist when considering beneficiary nominations:
- Check your super fund offers beneficiary arrangements that suit your circumstances;
- Check that the people you’re nominating are eligible beneficiaries;
- If you plan to nominate your personal legal representative, make sure your will is up to date;
- Complete and sign the proper nomination of beneficiary(s) form and send it to your fund;
- Whether your nominations are lapsing or binding, make sure you review them regularly.
When you’re considering who you’re going to leave your super to, it’s important to think about the people who matter most and how tax implications may affect the amount they could receive.
Maybe it’s time to put your affairs in order, and create a modern integrated estate plan before it’s too late?
Be cautious, and take advice before you decide.
When it comes to Wills, asset protection & estate planning in Australia, you can trust the oldest law firm in South Australia, Genders & Partners to guide you through the tough decisions you must make for your family’s future care and welfare.
If you have any questions, or would like further information, please call or email us. Would you like a quick phone call to discuss? Feel free to phone or email us or use this link and book a timeslot for a free 15-minute phone consultation on my schedule: https://calendly.com/genders
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We can help you to protect yourself and your family. We look forward to being of service.
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