How to keep control of your Super

How to keep control of your Super

If you are like most Australians, more and more of your family wealth is ending up in Super.  Read about the 6 key things you need to know to ensure you keep control of this important asset.

1. Who will control your Super Fund if you become incapacitated or die?

You, and the other members of your Fund, control the day-to-day activities of your Fund. If you are individual trustees, then you will do this personally. If you have a company trustee, then you do this in your capacity as a director of the company.

You will automatically cease to have any control over the Fund if you become incapacitated or die. The remaining trustees will continue on. Subject to any Binding Nominations and Reversionary Pensions (discussed below), the remaining trustees will decide who gets your benefits.

Your Fund Deed should contain provisions dealing with the appointment of a replacement trustee if you die. Pending a replacement appointment, the Super Law provides that your legal personal representative can act as a trustee from when you die until a replacement trustee is appointed under the Fund Deed. If you become incapacitated, then the Super Law also provides that your legal personal representative can act as a trustee in your place under an Enduring Power of Attorney. However, your Fund Deed must specifically allow this to happen.

If you have a company trustee, then you will cease act as a director while you are incapacitated or if you die. Any shares you hold in the company trustee must be dealt with in your Will.

Even if you make a direction in your Will regarding your Super, the trustees of your Fund are not necessarily obliged to follow such a direction – unless it is legally binding on them. Accordingly, you should:

  • Ensure that control over the Fund itself passes to someone you trust; and
  • If appropriate, make a Binding Nomination as to how your benefits are to be paid.

In summary, you should:

  • Ensure that your Fund Deed provides for:
    • Your Enduring Attorney to act as an individual trustee if you become incapacitated; and
    • The appointment of a replacement trustee if you die;
  • Ensure that you have an Enduring Power of Attorney in place, that appoints someone to look after your super if you become incapacitated; and
  • Consider putting in place a Binding Nomination to direct where your benefits are paid when you die.

2. How can you minimise tax on your Death Benefits?

The payment of a Death Benefit to a “Tax Dependent” will be tax-free. Whereas, the payment of a Death Benefit to someone who is not a Tax Dependent may be subject to tax. The rate of tax is either 0%, 16.5% or 31.5%, and depends on the source of the Death Benefit.

To the extent the Death Benefit is sourced from Non-Concessional Contributions, it will be tax-free, even if paid to someone who is not a Tax Dependent.

This gives rise to a number of strategies:

  • Maximise the extent to which Death Benefits are paid to people who are Tax Dependents.
  • Consider cashing your super prior to your death if you do not have any Tax Dependents.
  • Maximise the extent of your member balance that represents Non-Concessional Contributions. For example, it may be wise to cash certain benefits before death, and then re-contribute them as Non-Concessional Contributions.
  • Document any relationship of dependency that does not fall within the obvious categories of spouse and minor children.

Sometimes paying some tax on Death Benefits (e.g. 16.5%) is better than paying the benefit directly to a Tax Dependent who may then lose all of the benefit, e.g. if the Tax Dependent is likely to be sued, is a spend-thrift, has a gambling or drug habit, or if your Estate is likely to be challenged.

3. How can a Death Benefit be paid by your Fund?

In many cases, a Death Benefit may be taken as a Lump Sum or a Pension.

A Pension is often a good option, as it may be tax-effective, and protect the capital from claims against the beneficiary of the pension.

If the Pension is in existence prior to your death, and is structured as a “Reversionary Pension”, then it will automatically pass to the named Reversionary Beneficiary. For example, you may nominate your spouse as the Reversionary Pensioner.

A Pension can only be paid to a “Super Dependent”. Furthermore, when a child Super Dependent turns 25, the Pension must be commuted to a Lump Sum, unless the child has a prescribed disability.

The Fund Deed must allow for the type of Pension that you wish to pay.

4. How can you protect a Death Benefit paid to an “at-risk” beneficiary?

A beneficiary may be “at-risk” as a result of such things as:

  • Claims by creditors;
  • A potential relationship breakdown;
  • Potential claims arising from their profession or trade;
  • Because they lack the capacity to look after themselves; or
  • Because they have an uncontrollable bad habit (such as drugs or gambling).

The strategy to protect Death Benefits (and other assets) in these circumstances centres around ensuring that legal title to the assets does not vest completely in the beneficiary, and that control is shared with other sensible people.

The key method is to pay the Death Benefit into a “Testamentary Trust”. However, this requires the Death Benefit to be paid to your Estate. However, this may not be advisable if your Estate is likely to be challenged.

5. When should you make a Nomination, and what type of Nomination should you make?

In the absence of a Death Benefit Nomination, the trustee of your Fund can pay your benefits to any Super Dependent or your Estate, at their discretion. This decision may be subject to appeal.

The Super Law provides that you can make a “Non-Binding” or “Binding” Death Benefit Nomination to the Fund to direct the Trustee where to pay your benefits.

A Non-Binding Nomination must be considered by the Trustee, but they still have the ultimate say as to where your benefits are paid.

A valid Binding Nomination requires the Trustee to pay your entitlements as you direct. The Super Law only provides for Binding Nominations that last 3 years, by which time they must be renewed. Furthermore, a Binding Nomination will become ineffective if the beneficiary dies or ceases to be a Super Dependent.

A Self Managed Super Fund may provide for “Non-Lapsing Binding” Nominations. These must be provided in the Fund Deed itself. Such Nominations do not need updating every 3 years.

Furthermore, a Self Managed Super Fund may provide for imposing “Death Benefit Rules“. Nominations ordinarily relate to all or a proportion of your benefits, e.g. 50% to your spouse and 50% to your Estate. However, Death Benefit Rules can be more prescriptive, and direct the Trustee how to deal with a specific asset within the Fund, or how and when to establish a Pension for a beneficiary.

Although you must obtain specific advice about your particular circumstances, the following general rules can be helpful in deciding what type of nomination to make:

  • If you have any doubt who is going to control your super when you die, you should consider a Binding Nomination.  You will then be sure your wishes are carried out. If you have a Self Managed Super Fund, you may consider a Non-Lapsing Binding Nomination, if this is provided for in the Super Fund Deed.
  • If you are sure that the people in control of your super will act in a manner that matches your wishes, then you may consider a Non-Binding Nomination. A Non-Binding Nomination will clearly set out your wishes, but will also leave room for your trustee to make adjustments for the circumstances that apply after your death, e.g. if your Will is contested, or a nominated beneficiary is under threat.
  • If your Will is unlikely to be contested, then we suggest you nominate for your Death Benefits to be paid to your Estate, so they can then be dealt with under your Will.  Your Will can contain provisions to establish a Super Proceeds or Testamentary Trust.  These trusts may have tax benefits for your beneficiaries. Your Will can also impose conditions on when your benefits become available to beneficiaries – for example, as opposed to a child receiving all the benefits when they turn 18.
  • If your Will is likely to be contested, then you may wish to direct the trustee to pay the super benefits directly to one or more people directly.  This may not always protect the benefits from challenge, but will ensure that your wishes are clear.
  • If you have a Self Managed Super Fund, and you wish to direct specific super assets to specific Super Beneficiaries, then you may consider putting in place a Super Death Benefit Rule (provided this is allowed for in the Super Fund Deed).

6. What documents do you need in place to properly deal with your Super?

Your Fund Deed should be up to date, and you should provide the Trustee with any relevant Nominations or Rules.

You should also ensure that you have in place an Enduring Power of Attorney that allows your Attorney to administer your Fund if you become incapacitated.

Your Will should be drafted to take into account how you are going to deal with your Super. In particular:

  • If any super is to be paid to your Estate, then your Will should specify how the Super is to be dealt with, including the power to pay the Super in the most tax-effective manner.
  • If you have shares in a company that acts as the trustee for your Super Fund, you should ensure that those shares pass to a person who you would like to participate in the control of the Super Fund.

You should also appoint an Enduring Guardian to make lifestyle decisions on your behalf.

If you have Family Trusts, then you should execute documents that ensure these trusts can be administered if you become incapacitated, and to ensure that the assets and income of the trusts are dealt with as you intend after you die. You may be able to deal with the overall “control” of your trusts in your Will. But you may need to execute other documents if you wish to control what happens to specific assets within the trust.

All of your succession and Estate Planning documents should be drafted in a manner so they work together in a coherent way. This will minimise the chances of a costly dispute arising after your death.

To ensure that your super ends up with in the hands of the people you have been saving for contact us on 1300 654 590 or by email.

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