What happens to your Super when you die?
This article makes up part of our whitepaper ‘Everything you need to know about Self-Managed Super Funds’, you can download the full version here.
Superannuation is not considered an Estate asset as the death benefits are required to be distributed in accordance to the rules of the Trust Deed and as nominated in a Death Benefit Nomination. It is important that a Death Benefit Nomination is validly made in order to ensure that your superannuation benefits are paid to your intended beneficiaries, and to maximize the tax efficiency of the distributed benefits.
It is important to make a nomination to ensure that your superannuation benefits are paid to intended beneficiaries. This removes any discretion from the remaining trustee and avoids any potential disputes. Equally important is to ensure that you have valid wills, particularly if you wish to pass your superannuation death benefits to the estate instead of the SIS dependants.
What happens to your death benefit?
If you provide a binding nomination that satisfies all legal requirements, the trustee of the fund must pay your benefit to the beneficiaries you have nominated and in the proportions specified. Depending on the governing rules of the superfund a binding nomination can either expire after three years (unless you renew it), or it can be non-lapsing if allowed by the trust deed, which means it remains in place until you revoke it.
The trustee of the fund will decide which of your beneficiaries will receive your death benefit and in what proportion. Your nominated beneficiaries will be taken into account.
Depending on the product, the trustee will either pay your death benefit to your estate or it may use its discretion to determine the beneficiaries.
Risks and implications to consider
- Where no valid binding nomination is made (or it has lapsed), the trustee of the SMSF has discretion (discretionary nomination) as to whom the benefit will be paid to the trustee may be guided by a previous nomination made by the member, a non-binding nomination (a nomination that does not meet the requirement to be a binding nomination) or the deceased member’s will within the scope of the superannuation fund’s trust deed and legislative restrictions. The trustee may also decide that the benefit is to be paid to the legal personal representative (the deceased’s estate).
- Taxation of the benefit in the hands of a dependant beneficiary will depend on the age of either the deceased or the beneficiary at the date of death. If paid as a lump sum to a dependant beneficiary, it will be tax-free; if paid to the estate of the deceased, its taxation will depend on subsequent distribution to beneficiaries of that estate.
- It is important to review the trust deed to check that Binding Death Benefit Nominations are allowed. The nomination should be made in writing and be signed. It should also be made in accordance with the wording in the trust deed.
- The trust deed may specify that nominations need to be renewed on a regular basis, or that they remain valid until amended or revoked.
- Beneficiaries nominated to receive a member’s death benefits must be an eligible SIS dependant. When nominating who to receive the benefits, members of an SMSF are still limited to the list of SIS dependants.