Superannuation Estate Planning

This month’s Wealth Pipeline discusses superannuation estate planning. 

Superannuation Estate Planning

It is a common misconception that superannuation interests automatically form part of your estate upon your death. This is not necessarily the case. Ultimately, the superannuation fund’s trustee determines where a superannuation death benefit is paid. Depending on the superannuation fund, it may be possible to fetter the trustee’s discretion with a binding death benefit nomination.

Superannuation death benefits can only be paid to eligible ‘death benefit dependants’, and/or to the deceased’s estate.
Death benefit dependants include:

• Spouse. This definition includes a person (regardless of sex) who is in a genuine domestic relationship as a couple, or is party to a registered relationship pursuant to relevant state and territory legislation.
• Child. Child includes an adopted child, stepchild or ex-nuptial child.
• Person in interdependency relationship. This includes a close personal relationship between two people who live together, where one or both parties provide for the financial and domestic support, and care of the other. 
• Dependant (according to the ordinary meaning).

Death Benefit Nominations

A Non-Binding Death Benefit Nomination is an indication to the trustee of the nominating member’s preference for where their superannuation interest is paid.

A Binding Death Benefit Nomination (BDBN) compels the trustee to pay a superannuation interest to a nominated person(s) and/or to the deceased’s estate, provided the nomination is valid. BDBNs are usually either non-lapsing or lapse after 3 years.

It is important to note that a deceased person is excluded from the definition of a ‘death benefit dependant’. For example, Mr and Mrs Appleby may each have a valid BDBN in place, nominating the other as the sole beneficiary of their respective superannuation interests. If Mr and Mrs Appleby both die in the same car crash, the BDBN of the later person to die would be invalidated (on the basis that the nominated person is deceased).
For this reason, BDBNs should be ‘cascading’. That is, if a nomination becomes invalidated (like the above example), the benefit can then be paid to a second preference, and so on. Unfortunately not many industry and retail superannuation funds allow for cascading BDBNs.
Another issue to be aware of is that, legally your Enduring Power of Attorney (EPoA) may sign a BDBN on your behalf. Many superannuation funds restrict the ability to do so. For example, some funds only allow a lapsed BDBN to be renewed by a person’s EPoA if the renewal is identical to the lapsed nomination. 

Technical Intricacies

Section 59 of the SIS Act prima facie prohibits the discretion of a trust being exercised by someone other than the trustee (e.g. a member), except in accordance with regulation 6.17A SISR. Further, section 59 does not apply where the fund is an SMSF.
The ATO provided its view in SMSFD 2008/3; as “the statutory requirements in section 59(1A) and regulation 6.17A have no application to SMSFs”, the rules for nomination in an SMSF fall back to the deed. Most SMSF trust deeds allow for the equivalent of a BDBN. As a result it is imperative that SMSF trustees know their trust deed.

Lump Sum or Pension Death Benefits

Death benefits can be paid as a lump sum and/or a pension. A death benefit can be paid as a pension if the recipient is a ‘death benefit dependant’ who is not a child of the deceased, or a child who is:

• Less than age 18;
• Age 18-24 inclusive and financially dependent on the deceased; or
• Age 18+ and has a qualifying disability. 

A death benefit pension paid to a child must cease by age 25 unless the child has a qualifying disability. Not all superannuation funds allow death benefits to be paid as a pension.

Our Comments

Estate planning and superannuation estate planning is an area of great complexity. Our Wealth Pipeline merely brushes the surface of the topic. Superannuation estate planning should be determined on a case by case basis, and include consideration of the following:

• Should I have a BDBN?
• Anti-detriment payments
• Re-contribution strategies
• Method of distribution – i.e. lump sum and/or pension 
• Superannuation proceeds and testamentary trusts
• Superannuation tax dependants 
• Equalisation clauses in a will

Interestingly, tailoring of complex superannuation estate planning issues in many instances is sufficient reason to establish an SMSF. In a following Wealth Pipeline we will discuss taxation of superannuation death benefits.