Superannuation benefits don’t automatically form part of a person’s will. Upon death of the member, the trustees of the fund need to determine who will receive the member’s super benefits.
Where a binding nomination has not been made, the death benefits are usually paid to the legal personal representative (i.e. the estate).
In the case of a Self-Managed Superannuation Fund (SMSF), the trustees at the time of death of the member have ‘control’ over who is to receive the member’s benefits irrespective of what the will says.
The death benefits will need to be paid to dependants or their legal personal representative, but the trustee can decide, in the absence of a binding nomination, to pay the benefits at their discretion to either the legal personal representative or certain dependants to the exclusion of others.
It is therefore very important for the person to appoint a trustee in their will who will control the fund and follow his or her wishes.
Under superannuation legislation a dependant and a legal personal representative are defined as follows:
Dependant - includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.
Legal personal representative – means the executor of the will or administrator of the estate of a deceased, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person.
The main issues to consider when deciding who to leave superannuation death benefits to include:
1. Tax consequences to the recipient
- If paid to a spouse generally no tax;
- If paid to a minor child (i.e. under the age of 18) generally no tax;
- If paid to another person for whom there was an interdependent relationship generally no tax;
- If paid to the legal personal representative to be dealt with through the estate, tax of 15% on the ‘taxable component’ of the member’s super benefits if paid to an adult with no dependency to the deceased. This tax is paid by the estate; and
- If paid directly to an adult child with no dependency to the deceased, then the ‘taxable component’ is taxed at 15% + the Medicare Levy of 2%, so an effective tax rate of 17% on the death benefits paid to the recipient.
2. Possibility that beneficiaries or potential Beneficiaries may challenge the Estate
- By leaving benefits directly to a spouse or adult children, the estate is left out of the decision on how the benefits are paid. This is important in the case of blended families where a challenge could be made against the estate; and
- By leaving the benefits to the estate via the legal personal representative the super benefits are exposed to any risks relating to beneficiaries or possible beneficiaries of the estate challenging and attempting to get paid part of the super benefits.
3. How wealth will transfer on death of the beneficiary
- By leaving benefits to the legal personal representative, the estate may place funds in a testamentary trust for the benefit of the current spouse and children. This further protects the wealth on the death of the current spouse so as to ensure wealth continues to be passed through the deceased family.
It is important that the super fund is made aware of a person’s death benefit beneficiary via a Binding Death Benefit Nomination. This is even more important in a SMSF where control of the fund could end with parties who are not inclined to follow the deceased wishes.
