We have said several times that super is not part of your estate – so you may be wondering why on earth superannuation is featuring as part of our EP FAQ series. There’s only one thing to do if you’re curious – read on!
Why do I need to think about what happens to my super when I die?
Many people do not realise that super does not form part of your estate, and therefore is not necessarily subject to the directions in your Will. Depending on how much is held in super and whether there are insurances held in super, a superannuation payout on death can be substantial.
For this reason, it is very important that superannuation is considered in the estate planning process and appropriate directions are made for any money left in super after a person dies, known as ‘death benefits’.
There are a few different types of super fund in Australia. Most people are part of a public offer or retail fund, meaning that they are in a fund that is open to members of the public to join. Funds of this nature include Australian Super and funds run by financial services firms such as AMP and Macquarie. These can also include ‘industry’ funds that are specific to different industries, such as teachers, university employees, retail employees and health and community service workers. Some industry funds have a requirement that you are employed in that specific industry to be eligible for membership.
The State and Territory and Federal Governments operate their own super funds which are only open to employees. These super funds often have very specific rules and can restrict what kinds of directions members can make about their super after they have died.
The last kind of super fund is a self-managed super fund or ‘SMSF’. Individuals who prefer to be in control of their own superannuation fund and how their retirement savings are invested can set up their own super fund. A self-managed super fund has to comply with laws relating to super. SMSFs can only have up to 6 members and are subject to special audit and reporting requirements.
Who may get my super?
Only limited categories of people can directly receive your super – they must be a ‘super dependant’. Generally, these are:
- Your spouse;
- Minor children;
- People who are financially dependent on you when you die;
- People with whom you have a relationship of financial interdependence when you die; and
- The executor of your Estate.
A beneficiary that receives super death benefits directly receives them outside of the deceased’s estate and the death benefits become a personal asset of the recipient.
If your super is paid to the executor of your Estate, then you can nominate in your Will whomever you wish to receive your super. This provides flexibility as to who receives your super and means that your super death benefits can pass into a protective structure set up under your Will to hold super. Keep in mind that if the beneficiaries through your Will are not super dependents then there will be ‘top up’ tax payable on the distribution.
If you die with money left in super but have not directed how it gets paid, then the trustee of your super fund (being the controller of the fund) will make a decision as to how your super death benefits are to be paid out.
Who decides who gets my super?
The starting position is that the trustee of your super fund gets to decide who gets your super. The trustee must follow the rules that govern your super fund, as well as superannuation law.
Most funds provide the ability for you to make a nomination to the trustee as to where you would like your super paid. These nominations can either be ‘non-binding’ nominations or ‘binding’ nominations. A non-binding nomination is really just a statement of your ‘wishes’ – which the trustee may follow or choose to ignore. A valid binding nomination requires the trustee to do what you have asked – and effectively takes away the trustee’s discretion.
It is important to ensure that you have a valid nomination in place with respect to your super. If you do not have a valid nomination in place, the super fund trustee will decide who receives your super and will take into account any claims lodged with respect to your super death benefits. This could mean that somebody unintended receiving some or all of your super death benefits.
If you are not sure about what kind of nomination you should make then you should speak to a licensed financial advisor. Lawyers are not able to provide financial advice and this includes advice about what kind of super nomination someone should make.
What tax is payable when the money comes out of super?
The tax payable depends on a number of factors, including:
- The status of the money in super;
- How the money is paid out;
- Your age when you die;
- The age of your beneficiary; and
- The tax status of your beneficiary.
As a general rule, benefits paid to a spouse or child under 18 will be tax-free. Thereafter it gets more complicated and the factors mentioned earlier will apply.
Can I leave the money in super after I die?
Death is ordinarily a ‘compulsory cashing event’ – meaning that your super must be paid out. However, there are a couple of exceptions to this.
If you are receiving a pension from your super fund when you die, and you have nominated a valid ‘reversionary beneficiary’, then your super will remain in super, and the pension will continue for your beneficiary.
If you are not receiving a pension, you can nominate that a pension is established on your death – provided that the pension beneficiary is your spouse, child under 18 or a disabled child. Under this scenario the benefits remain within super while the pension is being paid.
Who takes over control of my SMSF after I die?
Any remaining members will continue as trustees (or directors of a company trustee) and will therefore have control of your SMSF.
If you are the sole member, your legal personal representative, being your Executor under your Will, steps into your shoes to pay out your super death benefits.
As such, it is very important that whoever is left in control of your SMSF is bound to deal with your super death benefits as you intend, namely via your valid binding death benefit nomination.
More questions about your estate planning?
We also have articles on frequently asked questions for:
- EP FAQ Part 1: What is estate planning and what do you need to consider?
- EP FAQ Part 2: Wills
- EP FAQ Part 3: Challenges to a Will
- EP FAQ Part 4: Financial Decision Making and Medical & Lifestyle Decision Making
- EP FAQ Part 5: Estate Administration
The information contained in this post is current at the date of editing – 25 September 2023.