Superannuation is typically one of our most valuable possessions, and it is also one of the most valuable assets we may leave to our loved ones. Although it is not required, superannuation might be incorporated in your estate plan if you follow the proper requirements.

When it comes to superannuation, death is an obligatory cashing event, which means it must be paid out. However, strict and complex restrictions regulate this, including who is eligible for benefits and how.

Unexpected consequences may occur if you do not fully plan for how your superannuation death benefits will be dispersed.

This article will introduce you to some of the most significant aspects of superannuation death benefit planning to help you understand where you may require additional counsel.

Beneficiaries who qualify for superannuation

According to the Superannuation Law, only a dependent or your estate (your legal personal representative) can receive your superannuation death benefits. Dependents under the Superannuation Law are:

• A spouse is a person (of the same or different sex) who lives with you in a true domestic connection or with whom you have a relationship registered by State or Territory Law (such as marriage, civil union, civil partnership, etc.).
• A child, as defined by the Family Law Act of 1975, might be your biological child, adopted child, stepchild, spouse’s child, or your own child.
• Any individual with whom you live, have a deep personal relationship, and are interdependent, with one or both of you assisting the other financially, domestically, and personally.

According to the definitions above, a parent, sibling, or friend cannot directly collect your superannuation death benefits unless they meet the criteria for an interdependent relationship. To ensure that such individuals receive your superannuation death benefits, you must first direct them to your estate (legal personal representative) and then distribute them in accordance with your will.

Not all beneficiaries are qualified to receive superannuation death benefits tax-free, even though the aforementioned individuals may be eligible. Superannuation tax-free is only available to those who satisfy the Tax Law’s definition of a death-benefit dependent (Income Tax Assessment Act of 1997). Dependents under the Tax Law include:

• A spouse or ex-spouse, which means the same thing as the previous definition.
• A child is defined as follows, but only if they are younger than eighteen.
• Anyone you share an interdependent relationship with, which means the same thing as described above.
• Anyone who relied on you in the final moments of your life.

Although the lists above appear to be very similar, there are some tiny differences that may effect how your superannuation death benefits are distributed and how much actually reaches the persons you wish to receive them.

Nominations for Superannuation Death Benefit

A superannuation death benefit nomination specifies what happens to your superannuation after you die. The majority of superannuation funds will have a mandated form on their website, however the Superannuation Industry (Supervision) Regulations 1993 outline what a nomination must include.

Nominations for superannuation death benefits are not always legally binding. Nominations that are legally binding are exactly that: binding. Unless the nomination is deemed invalid, the superannuation fund must follow it. On the other hand, if you submit a non-binding nomination, the superannuation fund is not required to adopt it; rather, it is simply a declaration of your preferences, which they may dismiss.

Nominations for superannuation death benefits may be either non-lapsing or lapsing. The bulk of legally binding nominations expire after three years. Non-lapsing nominations, on the other hand, are valid until you die or modify your first superannuation death benefit nomination.

The Hill v. Zuda decision from the High Court in 2022 specifies that nominations for self-managed superannuation accounts are exempt from the Regulations. When it comes to self-managed superannuation funds, you must adhere to the terms provided in the applicable trust deed.

Defined benefit estate planning and superannuation

Many people have specified their benefit superannuation interests, notably public employees who started their careers in the early 2000s or earlier. MSBS, DFRDB, CSS, and PSS are common defined benefit interests. When they retire, certain members of these funds can elect to receive their superannuation as a lifetime pension.

Because of the complex structure of defined benefit superannuation interests, the superannuation fund will not allow members to specify where their superannuation death payments should go after they die. If they are married and receive a pension, their spouse may be eligible to receive a portion of it for the rest of their lives. Otherwise, lump sum benefits may be given out based on the member’s age at death; however, the superannuation fund will decide where these funds go.

Defined benefit superannuation interest distribution criteria are commonly published on the websites of superannuation funds that provide them, or they may be stated in the trust deed or legislation that establishes the fund.

Self-managed superannuation funds and estate planning

Unlike standard accumulation and defined-benefit funds, superannuation death benefits from a self-managed superfund might include assets in addition to or instead of cash. This might present problems when a member of a self-managed superannuation fund dies, especially if the fund has more than one member.

Some important concerns when arranging for the distribution of superannuation death benefits from self-managed superannuation funds are:

• If the fund owns assets, can those assets be transferred “in specie” (that is, from the superannuation fund to the named dependent), or must the asset be liquidated while in the fund and just cash distributed?
• How would the compulsory cashing out of one member of a self-managed superannuation fund affect the remaining surviving member’s interest in the fund? Again, assets held in the fund will have to be liquidated in order to disperse the death benefits.
• Does the fund provide for pension payments? Is it conceivable and appropriate to provide a pension in these circumstances?

In addition to the foregoing, because members of self-managed superannuation funds must be trustees or directors of the trustee firm, it is critical to decide who will take over that function when you die. The improper person taking on that job can have a substantial impact on the distribution of your superannuation death benefits.

When estate planning for self-managed superannuation funds, it is beneficial to consult with other specialists such as lawyers, financial planners, and accountants to ensure that the most appropriate processes are followed.

Should your superannuation be included in your estate or kept apart?

When deciding whether or not to include your superannuation in your inheritance, some things to think about are as follows:

• Who is supposed to get it? Direct superannuation payments from the fund are only available to dependents (see above). Only if the first passes through your estate will a non-dependant (see above) be eligible to collect your superannuation death benefits.
• How will the rewards be disbursed? It’s possible that the super death benefits must be paid out straight from the fund, not through the estate, in order for the designated beneficiary to get a pension.
• Does the possibility of someone contesting your will exist? Avoiding superannuation from your estate could shield it from future claims for further funding (for instance, if you leave someone out of your will). However, watch out for hypothetical estate laws! In circumstances involving blended families, this can be very crucial.
• Do you have a comprehensive estate plan that includes trusts? In order to include your superannuation in a trust created in your will that offers some tax flexibility and asset protection (for instance, family law risks and vulnerable beneficiaries), it can be advantageous to have your superannuation paid to your estate.
• Does the distribution of superannuation have any tax ramifications? Do the aforementioned things affect this?

Why Connor Hunter?

One of our biggest assets could be our superannuation, and one of the biggest assets that we may leave to our loved ones is our superannuation death benefits. Your overall estate planning objectives may not be achieved if you update your estate plan without taking your superannuation into account.

Get in touch with Connor Hunter wills and estate lawyers for individualized guidance and professional help creating a strong strategy for your superannuation death benefits. We have the know-how to help you leave a lasting legacy for your loved ones.