Nathan Scott – Solicitor, Succession Planning
According to the Association of Superannuation Funds of Australia, there was $3.9 trillion worth of assets held in superannuation at the end of the March 2024 quarter. Superannuation can represent a significant portion of an individual’s wealth and many people overlook the importance of superannuation in their estate planning and often do not understand the specific rules and regulations which govern the payment of their superannuation entitlements on their death. Let’s look at the significance of superannuation in estate planning and the various options and strategies available.
Who can receive your superannuation?
When an individual passes away, their superannuation balance (known as a death benefit) does not automatically form part of their estate to be distributed with under their will. Instead, it is governed by specific rules and regulations about who can receive death benefits. This can lead to confusion and unintended outcomes if proper advice is not obtained as many people wrongly assume a will is sufficient.
Under the law, the following people may receive your death benefit:
- Spouse or partner;
- Children;
- Financial dependents, being individuals who were financially dependent on the deceased
- Interdependents, being persons who were in an interdependency relationship with the deceased, which can may include a close personal relationship, living together and providing each other with financial and domestic support; and
- Legal Personal Representative, being your executor (if there is a will) or administrator (if there is no will). The death benefit would then be distributed in accordance with your will or the rules of intestacy if there is no will.
Nominating your beneficiaries
There are several options available for nominating a beneficiary to receive your death benefit. The choice largely depends on your wishes and overall estate planning goals.
Often, people will want to nominate beneficiaries who do not fall into the categories outlined above (e.g. parents, nieces and nephews). If you want your death benefit to pass to such people, you need to obtain advice about how to best pass your death benefit to your intended beneficiary, or you risk your nomination being invalid.
Understanding how superannuation benefits are taxed can also lead to more favourable tax outcomes for beneficiaries, especially when considering the tax implications for tax dependents and non-dependents (which is a whole other topic!). Often, it is a matter of your lawyer, financial planner and accountant working together to determine and implement the best strategy.
Binding Death Benefit Nominations
A Binding Death Benefit Nomination allows you to specify exactly who will receive your death benefit. This nomination is legally binding on the fund, provided it is validly executed and meets specific requirements set by the superannuation fund and the law (most importantly, your nominated beneficiary must fall into one of the categories of persons outlined above).
A BDBN provides certainty that your death benefit will be paid in accordance with your wishes, however, given the strict requirements for a valid BDBN, it is important to get proper advice when making such a nomination. It is also important to note that with many funds, BDBNs lapse and need to be renewed every three years.
Non-Binding Death Benefit Nominations
Non-binding nominations allow you to express your wishes regarding who should receive your death benefit, however, as the name suggests, it is not binding on the fund – the fund will take it into consideration but still has discretion in deciding how to distribute the benefit to your dependents.
This option provides flexibility and may be beneficial if family circumstances change, however, since the fund is not bound to follow the nomination, it can lead to uncertainty and disagreements among potential beneficiaries.
Reversionary Pensions
A reversionary pension is a type of income stream that automatically transfers to a nominated beneficiary upon the death of the pension holder. This option is particularly relevant if you are in pension phase and receiving an account-based pension from your superannuation at the time of death. The nominated beneficiary continues to receive the regular payments, and if the reversionary beneficiary meets certain requirements, they may enjoy favourable tax treatment by receiving a pension compared to a lump-sum payment.
Conclusion
Superannuation is an essential component of estate planning. By understanding the available options and getting proper advice, individuals can ensure their superannuation is distributed according to their wishes.
To avoid potential pitfalls, it is advisable to seek professional advice. At Beck Legal, our experienced estate planning lawyers are here to help you navigate the complexities of superannuation in estate planning and can assist you with creating a plan that reflects your wishes and provides peace of mind for you and your family. Contact us today to discuss your superannuation and estate planning needs.