Superannuation Estate Planning

This month’s wealth pipeline topic is superannuation estate planning and is split into two parts.  In part one we look at superannuation death benefits and superannuation death benefit nominations.

Superannuation Estate Planning

Superannuation death benefits (inclusive of any life insurance held by a superannuation fund on behalf of a member) generally do not form part of the deceased’s estate.  It is paramount that members of superannuation funds put mechanisms in place to ensure their superannuation interests are distributed efficiently and according to their wishes in the event of their death.

Upon death, assets generally fall into two categories, estate assets and non-estate assets. 

• Estate assets are those that are personally owned.  Examples of estate assets include cars, bank accounts, shares, antiques and assets held as tenants in common.  Estate assets are assets that form part of the deceased's estate.

• Non-estate assets are assets that are not personally owned.  Examples of non-estate assets include assets held as joint tenants, company assets, family trust assets, life insurance proceeds where a beneficiary has been nominated and superannuation death benefits.  As the name suggests non-estate assets do not form part of the deceased's estate.

Superannuation Death Benefits

As mentioned earlier superannuation generally does not form part of the deceased's estate assets, however there are three scenarios when this is the case:

1. If the superannuation trustee has discretion and decides to pay the death benefit to the member's legal personal representative (LPR).
2. The superannuation trustee does not have discretion as the superannuation fund's governing rules requires all death benefits to be paid to the member's LPR.
3. The superannuation trustee does not have discretion as the superannuation member has fettered the discretion of the trustee by executing a valid binding death benefit nomination which requires the trustee to pay the death benefit to the member's LPR.

Unless permitted by the trust deed, binding death benefit nominations do not apply to self managed superannuation funds (SMSFs).   

Superannuation Death Benefit Binding Nominations

A binding nomination is a written direction to the superannuation fund trustee that instructs the trustee to pay a member’s entitlements to the member’s LPR and/or dependents in the proportions the member wishes in the event of their death.  While a valid binding nomination provides certainty to the member that their chosen beneficiary(s) will receive their superannuation benefit, the member is limited in his/her choice of beneficiary.  Beneficiaries are restricted to the member's LPR and dependants, who are defined under superannuation law to be:

• the person’s spouse;
• child (of any age);
• financial dependant; and
• a person in an independency relationship with the member at the time of death.

To ensure the death benefit is paid to the nominated beneficiary(s), a binding nomination usually needs to be less than three years old and executed correctly.  Without a valid binding nomination in place, superannuation death benefits are paid at the discretion of the superannuation fund trustee.  The superannuation fund trustee is only able to distribute death benefits to the categories listed above and the member’s LPR.

Superannuation death benefits can be paid either as a lump sum, a superannuation pension or a combination of both.  However, not all superannuation dependants are entitled to receive a superannuation death benefit in the form of a pension.

In part two of this Wealth pipeline series, we will look at how superannuation death benefits are taxed.