For many Australians, superannuation is the largest component of their wealth when they die, particularly if insurance is held within the fund. Since superannuation was designed to provide for your retirement and your dependants after your death, it is often the major asset in an estate. So it stands to reason that because you have worked hard for your super you want to be careful about how it is distributed.
In a previous article, we talked about where your superannuation goes if you are part of a government defined benefits scheme. However, most Australians have superannuation within an accumulation style fund, such as a retail fund, an industry fund or a self-managed superannuation fund. It is a regular occurrence to see clients who are surprised to learn that their superannuation is not automatically dealt with by their will.
When you meet with us we will provide specific advice and recommendations about what you should do to ensure that your superannuation is distributed as you intended. In this article we give an overview of the different types of beneficiary nominations and whether it might be best for your superannuation to be sent to your estate or not.
Binding and non-binding beneficiary nominations explained
With your superannuation, you can either leave a binding nomination or a non-binding nomination to express your preferences for how your super will be paid after your death. Sometimes non-binding nominations are called preferred nominations.
Generally speaking, many people have non-binding nominations because administratively it is usually easier to make this type of nomination. It can often be done online or by phone and most of the time there is no expiry date on a non-binding nomination. If you leave a non-binding nomination or if you leave no nomination at all, then after your death, it will be the trustee of your super fund who will decide how your super is paid. The trustee’s discretion means a non-binding nomination is akin to a statement of your wishes.
The trustee will ask for information about who is in your family and who is financially dependent on you at the time of your death. They may take into account what your will says but they are not required to be bound by it. The trustee will then make a decision about who to pay the superannuation death benefit to. So if you don’t have a binding nomination in place, the decision about who receives your super is essentially made by a board of strangers.
Additionally, when there is no binding nomination after someone’s death the trustee’s decision can be reviewed and challenged by any potential beneficiaries who are unhappy with the result. This complaint process can delay the payment of the superannuation death benefit, sometimes for years.
Conversely, with a binding nomination, the small amount of additional upfront administration is usually well worth it to provide certainty as to who will receive your super after your death. Generally, a form would need to be signed by the member and witnessed by two adults (who are not beneficiaries). In the case of many superannuation funds, a binding nomination expires after three years, so it’s crucial to keep it current and don’t assume that the nominations are set in stone.
If you have a binding nomination which has expired because the three years have elapsed, it then usually reverts to a non-binding nomination, leaving the payment of death benefits up to the trustee’s discretion.
Can I nominate anyone to receive my superannuation?
In terms of who can receive your superannuation, you cannot just nominate anyone in a beneficiary nomination. You can only nominate one or a combination of the following:
- your spouse
- someone who is financially dependent on you
- someone who is in an interdependent relationship with you
- or your estate.
You cannot nominate your parents, a sibling or a friend to receive your superannuation under a binding death benefit nomination, unless they are dependent on you. Some super funds will tell you if they receive a binding nomination in favour of someone who is invalid, but not all super funds carry out a review at the time you do the nomination. So there are many people who think they have got a binding nomination in place and are then surprised to discover that the nomination is not binding because they have nominated someone who cannot receive the benefit.
So who should I nominate?
There are no hard and fast rules or one size fits all approach to nominating beneficiaries, as it will depend on your family circumstances and your objectives. Whenever I am advising a client about estate planning, I will always be considering their superannuation and give recommendations about whether or not they put in place a binding death benefit nomination. I also provide recommendations about who to nominate to receive their super and consider how the death benefit will be taxed.
For example, in the case of a blended family a client might say they would like their superannuation to go to their adult children from their first marriage and to give other assets to a new partner. The problem is that the children, if they are independent, will be required to pay a considerable sum of tax on it, but their partner would receive a tax free benefit. So in cases like this, we would look at how else you can give the same value of benefit to your children but with a better tax outcome.
When we work with a client on estate planning we consider whether we intentionally want the death benefit to go to the estate or if we want to specifically keep it out of the estate, as there are different reasons for doing one or the other.
Why you might not want your superannuation to be sent to your estate
For many people, nominating their estate to receive their superannuation makes a lot of sense. However, some of the reasons that we might want to keep your superannuation out of the estate might be if you are concerned a family provision claim may be made against the estate. If you are worried that someone might dispute the will and try and seek a greater benefit out of the estate, then keeping assets out of the estate and sending them to a beneficiary directly might reduce the risk of dispute.
So for example, with blended families, where you may want to give everything to your partner and want to make sure that your partner is not going to face any disputes or challenges from adult children from a previous marriage. If the superannuation goes into your estate, that means it is an asset the children can make a claim against. If the superannuation goes directly to your spouse, he or she gets it directly and, depending on which state they live it, it may result in quarantining the superannuation from the estate so it cannot be claimed against. Another example where this might be the preferred option is if you want your superannuation to go to one child and not the other.
Why you might want to send your superannuation to your estate
The reasons as to why you might want to send your superannuation benefit to your estate include if you want to place conditions on the inheritance. For example, if you want it to go to children but you want to set an age later than 18 at which they get access to the money, say at age 25, or if you want to specify who will manage that money for minor beneficiaries.
Some clients want to make sure that the other parent of their minor children has absolutely no control or access over the money, but if you have nominated your child directly in your superannuation, then it is possible that the surviving parent may be appointed to manage that money for the minor child. Sending the benefit to the estate instead means you can set out the terms on which (and by whom) that superannuation is to be managed for the minor children.
The other reason you may want to send it to the estate is if you want the superannuation proceeds to flow into a testamentary trust established by the will so that your beneficiaries have the tax and asset protection benefits of the trust.
Getting help with your decision
As you can see there are a number of considerations taken into account when working out the ideal approach to ensuring your superannuation death benefit is paid out as per your intentions. As the funds are likely to be one of the largest parts of your estate, you should not be making these complex decisions without some professional advice.
As specialist estate lawyers, we can give recommendations about what to do with your superannuation. Taking into account the context of everything that you are wanting to do with your estate planning and making sure that your will and super nominations are working together so disputes are minimised and additional stress is not created for your family members at an already trying time. By seeking legal advice you will be in control and have a level of certainty knowing what will happen with your superannuation, rather than leaving it up to the trustee’s discretion.
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Rebecca Tetlow is the ACT’s only Accredited Specialist in Wills and Estates.
The DDCS wills and estate planning team are highly experienced and specialise in helping people navigate issues like these. To discuss your circumstances, phone our team on (02) 62127600 or fill in the contact us form and our team will be in touch.