Granted, it is not necessarily something anyone wants to talk about, but with nothing more certain than death, it is worth addressing. What happens to my Super when I die?
First and foremost, you may not be aware that superannuation is not actually an estate asset. What does that mean? Well, in the event of your death, superannuation is not automatically distributed in accordance with your will (provided you even have one in place at the time).
Under superannuation law, only your spouse, your children, a financially dependent individual or someone with whom you are in an interdependent relationship can receive Super directly. Nominating any other individual such as an uncle, cousin or friend is a pointless exercise as they are not eligible to receive your Super should you die.
It is still possible for superannuation to end up in the hands of anyone you wish, however you need to make a specific request to have proceeds paid to your legal personal representative, otherwise known as the executor of your estate. Before you can make this request, you need to make sure that you have a valid will in place in which you can nominate exactly how you want your estate assets to be paid.
It is important to note that under superannuation law, there is no minimum time frame for someone who is living with you to be considered a spouse, so long as you are in a bona fide domestic relationship. Therefore, unlike state family laws, someone you have lived with for less than six months could have claim to your superannuation death benefits, which may (or may not) be something you actually want.
When it comes to making a nomination, there are several options available. Firstly, you can elect to make a binding death benefit nomination (BDBN), which can be very useful in situations of blended families for example. Essentially, when a valid BDBN is in place, the trustees of your superannuation fund must pay your death benefits as instructed.
Secondly, you could elect to make a non-binding death benefit nomination. This nomination does not force the trustee of your superannuation fund to pay your benefit as instructed and in unfortunate and unforeseen cases, a trustee may use their discretion and pay the benefit to someone else.
There is still some appeal in allowing the trustee of your superannuation fund to have discretion, as at the date of your death, your situation may have actually changed. For example, you could be legally married when you die, however you may have actually separated and started a new relationship. If you were to have a BDBN with payment to your former spouse, the trustee would have no choice but to act on your wishes at the time you signed the BDBN and pay your death benefit as instructed, even if you wanted your new spouse to receive the funds.
If you have a self-managed superannuation fund (SMSF), it is likely that you would be your own trustee and therefore, can incorporate your wishes into the fund’s trust deed. In addition, if you are in a pooled SMSF that has a corporate trustee, of which both members are directors, you could elect to make no-nomination. This provides the surviving director of the trustee company full discretion to pay out benefits in accordance with their wishes.
Most death benefit payments are made in the form of a lump sum, however in some cases it can be possible to pay an income stream. A child is able to receive a death benefit income stream if they are under 18 years of age, or under 25 and still financially dependent, or disabled. The income stream must be cashed in by age 25 unless the child is permanently disabled.
Minimising tax should be another consideration when nominating a beneficiary. The tax treatment can be different depending on whether the beneficiary is considered a dependent under tax law and whether the benefit is paid as a lump sum or income stream. In addition, your superannuation account can be made up of tax-free and taxable components which also impacts how a benefit is taxed.
For example, if the benefit is paid to your spouse who is a tax dependent under tax law, the taxable component will be paid tax-free. If the benefit is paid to an adult child, the benefit is taxed at 15% plus 2% Medicare levy. In some cases, the taxable component of the benefit would be taxed at 30 percent. E.g. some old government superannuation funds were untaxed and therefore there will be tax of 30%, so that the same amount of tax is paid mirroring the tax model of modern super funds.
If you have a valid will in place and have nominated your legal personal representative, the benefit will be taxed in the same way as if it were paid directly to those benefiting, however the estate is not subject to the Medicare levy.
Finally, the tax on a death benefit pension is based on factors such as the age when you die and the age of the beneficiary. If either is over age 60, there is no tax payable. If it has been paid from an untaxed fund, the pension will be taxed at marginal rates less a 10 percent tax offset. In all other cases, the taxable component on the pension will be taxed at marginal rates and may receive a tax offset.
To avoid any unintended consequences, it is important that your nominations remain up-to-date and that you seek professional guidance to ensure you have the appropriate estate planning measures in place.
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Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.