An often-asked question from our members is “what happens to your super when you die?”. It’s an important question. This is why understanding how to plan your super death benefits and what steps to take may make things clearer and easier for family members and other beneficiaries.
When you die, your superannuation (super) death benefits can be paid to anyone who meets the definition of 'dependant' under the Superannuation Industry Supervision (SIS) legislation and/or the Legal Personal Representative (LPR) (i.e. the trustee of your deceased estate).
Nominating beneficiaries with your super fund is the only way to direct your death benefits to the people you want to receive it. The steps you take will depend on your circumstances and who your intended beneficiaries are.
Nominating parents
If you want to leave your super to your parents, they need to meet the definition of dependants under the SIS legislation. This means they must be either financially dependent on you or be in an interdependent relationship. Otherwise, your parents could receive your death benefit if it’s paid to your LPR and your Will stipulates that your parents will receive it.
Nominating young children
Children are ‘dependants’ under the SIS legislation. However, not all children are ‘dependants’ for tax purposes.
Children under 18 are considered dependants for tax purposes, so they can receive death benefits tax-free and have the option of receiving death benefits as a lump sum or, in some cases, as a pension.
If minor children are nominated directly, it is common practice for the benefits to be paid in trust to the child via a beneficiary trust, with the legal guardian as the trustee. Under the beneficiary trust, normally the trustee can invest all or part of the benefit on behalf of the child, and withdraw funds for the maintenance, betterment and education of the child. In practice, the trustee of the beneficiary trust pays for clothes, school fees, uniforms and supplies, sports or other out of school activities. Alternatively, you may consider nominating your LPR and in your Will setting up a testamentary trust to hold and distribute super benefits to your children.
Nominating adult children
Adult children who are not financially dependent may pay tax of up to 17% on the taxable component of a super death benefit (15% plus the 2% Medicare Levy). For this reason, when the beneficiary is not a dependant for tax purposes, directing the benefit via the estate can have tax advantages. A deceased estate is not an individual taxpayer and therefore does not pay the Medicare Levy (currently 2%). In addition, the benefit is not added to the beneficiary’s assessable income, and thus does not affect entitlements they may be receiving based on their assessable income, such as Family Tax Benefit, child support, HELP debt repayment and Division 293 tax.
The trustee of the super fund cannot pay a death benefit pension to a child over age 25, unless they are disabled (as defined under s 8(1) of the Disability Services Act), so any payment can only be taken as a lump sum. This applies even if the child qualifies as a dependant for tax purposes under financial dependency or through an interdependent relationship.
Nominating a partner
For the purposes of SIS and taxation law, the spouse of a person includes a partner to whom they are married, in a registered relationship, or, lives with on a genuine domestic basis in a relationship as a couple. If the couple don’t live together and are unable to meet any of these definitions (or an exception) and there is no financial dependency, then the partner may be able to receive death benefits if the Will stipulates the partner will receive it.
When is a nomination invalid?
If a binding nomination is invalid or there is a non-binding nomination, then the fund has the discretion to decide who receives the benefits.
A binding nomination may be invalid if it doesn’t comply with the rules of the super fund or the SIS legislation. For example, if you nominate a non-dependant, such as a friend, a charity, or a dog, the nomination will be invalid. Similarly, if you nominate a dependant who predeceases you or ceases to be a dependant after you make the nomination, your nomination will become invalid.
For this reason, it’s important to review and update your binding nomination/s if your circumstances change.
Directing super benefits to your Will
Nominating your LPR and directing your death benefits to your Will may be appropriate when you want to leave your super to non-dependants. You can also consider creating a testamentary trust to protect beneficiaries from creditors, family law claims, or spendthrift habits. It’ll be important to consider who or whom would be appropriate to serve as the trustee of the testamentary trust. However, directing your super to your Will can have some drawbacks. For instance, super benefits will form part of the estate and may be subject to probate, legal challenges, and will take longer to be paid to the ultimate recipient.
How super funds process death benefit claims
As a superannuation fund, we’re often asked what the process is for dealing with death benefit claims.
When a member of a super fund dies, the fund has the responsibility to pay the death benefits to the beneficiaries and/or the LPR. This process can be complex and time-consuming, depending on the type and validity of the nomination, the identity and number of the beneficiaries, and the amount and nature of benefits. Here are some of the steps and challenges involved.
Verifying the death
The first step is to verify the death of the member and obtain a copy of the death certificate. If the member has death cover within the fund, a claim will also need to be lodged with the fund’s insurer. It may take some time for the fund’s insurer to assess the claim.
Identifying the beneficiaries
The fund must identify the beneficiaries of the death benefits. This may involve checking the member's beneficiary nomination form/s, if there is one, and determining if it is valid and binding.
If the nomination is invalid, non-binding, or does not exist, the fund has the discretion to decide who receives the benefits, based on the SIS legislation and the fund's trust deed. The fund may need to conduct further investigations and go through a process to identify, locate and review potential beneficiaries. Laws regarding estates and what happens when a person dies intestate vary from state to state.
Some of the documents the fund may need to review a death claim include:
- Death certificate
- Copy of the Will and Probate, or Letters of Administration where a member has passed away without a Will
- Proof of Identity for the beneficiaries
- Proof of the relationship between the beneficiary/s and the member
Calculating and paying the benefits
The final step is to calculate and pay the death benefits to the beneficiaries. This may involve valuing the member's account balance, including any insurance proceeds. The fund may also need to determine the tax implications of the payment, such as whether the beneficiaries are dependants for tax purposes, and whether the benefits are paid as a lump sum or a pension. The fund should communicate with beneficiaries and provide them with information about their options and rights.
Planning ahead
The best thing to do is plan. For many people, making a beneficiary nomination is relatively straight forward, but depending on your circumstances you may need to get professional advice. Also important is to ensure that your nominations are up to date and to review them regularly and if your circumstances change.
Brooke Logan is a technical and strategy lead in UniSuper's advice team. UniSuper is a sponsor of Firstlinks. Please note that past performance isn’t an indicator of future performance. The information in this article is of a general nature and may include general advice. It doesn’t take into account your personal financial situation, needs or objectives. Before making any investment decision, you should consider your circumstances, the PDS and TMD relevant to the financial product, and whether to consult a qualified financial adviser.
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