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What happens to your super when you die?

An often-asked question from our members is “what happens to your super when you die?”. It’s an important question. This is why understanding how to plan your super death benefits and what steps to take may make things clearer and easier for family members and other beneficiaries.

When you die, your superannuation (super) death benefits can be paid to anyone who meets the definition of 'dependant' under the Superannuation Industry Supervision (SIS) legislation and/or the Legal Personal Representative (LPR) (i.e. the trustee of your deceased estate).

Nominating beneficiaries with your super fund is the only way to direct your death benefits to the people you want to receive it. The steps you take will depend on your circumstances and who your intended beneficiaries are.

Nominating parents

If you want to leave your super to your parents, they need to meet the definition of dependants under the SIS legislation. This means they must be either financially dependent on you or be in an interdependent relationship. Otherwise, your parents could receive your death benefit if it’s paid to your LPR and your Will stipulates that your parents will receive it.

Nominating young children

Children are ‘dependants’ under the SIS legislation. However, not all children are ‘dependants’ for tax purposes.

Children under 18 are considered dependants for tax purposes, so they can receive death benefits tax-free and have the option of receiving death benefits as a lump sum or, in some cases, as a pension.

If minor children are nominated directly, it is common practice for the benefits to be paid in trust to the child via a beneficiary trust, with the legal guardian as the trustee. Under the beneficiary trust, normally the trustee can invest all or part of the benefit on behalf of the child, and withdraw funds for the maintenance, betterment and education of the child. In practice, the trustee of the beneficiary trust pays for clothes, school fees, uniforms and supplies, sports or other out of school activities. Alternatively, you may consider nominating your LPR and in your Will setting up a testamentary trust to hold and distribute super benefits to your children.

Nominating adult children

Adult children who are not financially dependent may pay tax of up to 17% on the taxable component of a super death benefit (15% plus the 2% Medicare Levy). For this reason, when the beneficiary is not a dependant for tax purposes, directing the benefit via the estate can have tax advantages. A deceased estate is not an individual taxpayer and therefore does not pay the Medicare Levy (currently 2%). In addition, the benefit is not added to the beneficiary’s assessable income, and thus does not affect entitlements they may be receiving based on their assessable income, such as Family Tax Benefit, child support, HELP debt repayment and Division 293 tax.

The trustee of the super fund cannot pay a death benefit pension to a child over age 25, unless they are disabled (as defined under s 8(1) of the Disability Services Act), so any payment can only be taken as a lump sum. This applies even if the child qualifies as a dependant for tax purposes under financial dependency or through an interdependent relationship.

Nominating a partner

For the purposes of SIS and taxation law, the spouse of a person includes a partner to whom they are married, in a registered relationship, or, lives with on a genuine domestic basis in a relationship as a couple. If the couple don’t live together and are unable to meet any of these definitions (or an exception) and there is no financial dependency, then the partner may be able to receive death benefits if the Will stipulates the partner will receive it.

When is a nomination invalid?

If a binding nomination is invalid or there is a non-binding nomination, then the fund has the discretion to decide who receives the benefits.

A binding nomination may be invalid if it doesn’t comply with the rules of the super fund or the SIS legislation. For example, if you nominate a non-dependant, such as a friend, a charity, or a dog, the nomination will be invalid. Similarly, if you nominate a dependant who predeceases you or ceases to be a dependant after you make the nomination, your nomination will become invalid.

For this reason, it’s important to review and update your binding nomination/s if your circumstances change.

Directing super benefits to your Will

Nominating your LPR and directing your death benefits to your Will may be appropriate when you want to leave your super to non-dependants. You can also consider creating a testamentary trust to protect beneficiaries from creditors, family law claims, or spendthrift habits. It’ll be important to consider who or whom would be appropriate to serve as the trustee of the testamentary trust. However, directing your super to your Will can have some drawbacks. For instance, super benefits will form part of the estate and may be subject to probate, legal challenges, and will take longer to be paid to the ultimate recipient.

How super funds process death benefit claims

As a superannuation fund, we’re often asked what the process is for dealing with death benefit claims.

When a member of a super fund dies, the fund has the responsibility to pay the death benefits to the beneficiaries and/or the LPR. This process can be complex and time-consuming, depending on the type and validity of the nomination, the identity and number of the beneficiaries, and the amount and nature of benefits. Here are some of the steps and challenges involved.

Verifying the death

The first step is to verify the death of the member and obtain a copy of the death certificate. If the member has death cover within the fund, a claim will also need to be lodged with the fund’s insurer. It may take some time for the fund’s insurer to assess the claim.

Identifying the beneficiaries

The fund must identify the beneficiaries of the death benefits. This may involve checking the member's beneficiary nomination form/s, if there is one, and determining if it is valid and binding.

If the nomination is invalid, non-binding, or does not exist, the fund has the discretion to decide who receives the benefits, based on the SIS legislation and the fund's trust deed. The fund may need to conduct further investigations and go through a process to identify, locate and review potential beneficiaries. Laws regarding estates and what happens when a person dies intestate vary from state to state.

Some of the documents the fund may need to review a death claim include:

  • Death certificate
  • Copy of the Will and Probate, or Letters of Administration where a member has passed away without a Will
  • Proof of Identity for the beneficiaries
  • Proof of the relationship between the beneficiary/s and the member

Calculating and paying the benefits

The final step is to calculate and pay the death benefits to the beneficiaries. This may involve valuing the member's account balance, including any insurance proceeds. The fund may also need to determine the tax implications of the payment, such as whether the beneficiaries are dependants for tax purposes, and whether the benefits are paid as a lump sum or a pension. The fund should communicate with beneficiaries and provide them with information about their options and rights.

Planning ahead

The best thing to do is plan. For many people, making a beneficiary nomination is relatively straight forward, but depending on your circumstances you may need to get professional advice. Also important is to ensure that your nominations are up to date and to review them regularly and if your circumstances change.

 

Brooke Logan is a technical and strategy lead in UniSuper's advice team. UniSuper is a sponsor of Firstlinks. Please note that past performance isn’t an indicator of future performance. The information in this article is of a general nature and may include general advice. It doesn’t take into account your personal financial situation, needs or objectives. Before making any investment decision, you should consider your circumstances, the PDS and TMD relevant to the financial product, and whether to consult a qualified financial adviser.

For more articles and papers from UniSuper, click here.

 

19 Comments
Rick
August 25, 2024

A bit of hysteria above about super pay out delays. First thing is your spouse and or dependants should have access to some cash until the super claim runs its course. Within a couple of weeks has been my experience once the correct documentation is provided. Secondly get expert advice on having the appropriate binding beneficiary request in place. I recently spoke to a couple approaching pension age with moderate amounts of super saying they have stayed away from contributing as they have been told the government may access it in the future. Perhaps this alluded to the tax on pre-tax contributions going to non-dependants. Disinformation, the odd news headline and advice from a friend of a friend is a sure way to miss out on utilizing the best vehicle we have as PAYG taxpayers to save for retirement in a tax efficient way.

Mark
August 25, 2024

Over the years I have carried out a number of re-contribution strategies using the 3 year bring forward rule with my Industry Fund. Currently no charge is applied by my fund to implement this strategy.
They fully assist with forms and support me during the process etc.
2011 Accumulation account Taxable Component 53 3% - Tax Free Component 46.7%.
2024 Account Based Pension account TC 17.3% - TFC 82.7%, this has created a major tax saving for my NDB.
Being 69yoa I have just carried out another re-con strategy and I will perform one more prior to reaching 75yoa.
Fancy gifting the ATO a small fortune on your death.

Ian
August 25, 2024

I read this and think if I can manage it I should try to give most of it away to where and whom I intend before I die. The required process is not exactly smooth.

Chris
August 23, 2024

In short, good luck getting hold of it because the fund will kick and scream to relinquish the money (all the while, earning lazy interest on it for themselves), let alone the Government taking their cut of it.

Fund Board member
August 24, 2024

Chris that's total b...s.

Chris
August 25, 2024

Really ?

Look up:
- People being told by the fund to return to the hospital where it happened, and to get a second certificate specifying the cause of.
- "Superannuation payout delays throw spotlight on 'harrowing' ordeal for families"
- "AFCA tells funds to review benefit payout processes"
- "Nick Bruining: ASIC puts superannuation funds on notice over shocking delays in benefit payouts"
- "Anonymous 11 - Submission in response to Treasury.gov.au, Unreasonable delay in paying out the fund".
- "Complaints to the ombudsman about delays in releasing super to a surviving spouse or other beneficiaries has more than tripled in the financial year ending 30 June 2023."

Should I continue, or is all that just Bravo Sierra too ?

Fund Board member
August 25, 2024

Chris, nothing you've referred to establishes a pattern of "kicking and screaming" across the industry that warrants your persistent attempts to label superfunds as malicious. There are incidents that need review - and from the articles have been reviewed - but you are intentionally ignoring the vast number of cases where benefits are paid without a glitch. Certainly the fund on whose Board I sit has no issues.
So there's totally no need for your negativity and insults to the superannuation industry as a whole.

And listing lots of articles about the same bit of information doesn't actually mean the problem is bigger!

Michael
August 23, 2024

It may be off topic slightly, but if you want to leave your super to non-dependent children, as I do, then if you are slowly slipping away and know that your days are numbered, it may be best (due to tax reasons) to withdraw some or all of your super (tax free if over age 60) before your death. Of course this cannot occur with a sudden death, but most of us get at least a few weeks or months' notice of our likely demise. Personally, if I know my days are numbered, I don't want to have any money in super as it may take ages to get paid out. Just my opinion, not financial advice.

Michael
August 23, 2024

I should add - this of course assumes I have no insurance cover. At age 65 I don't have any.

Irene
August 25, 2024

What kind of insurance cover you are talking about, Michael? Life insurance?

Sue
August 22, 2024

Re Identifying the Beneficiaries.
I just created a pension from my accumulated superannuation. Nominating my husband as the beneficiary. Two pieces of information were required by my fund - His name & Date of Birth. Where does the fund start to locate my husband, upon my death ?

David
August 22, 2024

What is best practice for the situation of a couple both with account based super funds who want their funds to revert to their partner in the event of their individual deaths but who want the funds to payout to their LPR in the event of their simultaneous death?

Brooke Logan
August 23, 2024

Hi David. There are laws regarding what happens when a couple die simultaneously and these vary from state to state. For example, in some states it is assumed the oldest member of a couple died first in this instance and this has implications therefore for each person's super death benefits and other assets. An estate planning specialist can assist the couple, a common strategy is to add a clause to the will providing detail about what happens if both members of the couple die simultaneously (often called a titanic clause)

David
August 23, 2024

Thanks Brooke. So in terms of nominating beneficiaries for our pension funds do you suggest nominating each other (and assuming no titanic event) or nominating our LPR and suffering any process delays in the probable event of one of us dying before the other?

Michael
August 22, 2024

If the proceeds of a SFMS are directed to an estate are there tax implications for beneficiaries of the estate particularly non dependents as there are in beneficiaries of a SMSF.?

Brooke Logan
August 23, 2024

Hi Michael, if the beneficiary via the estate is a non dependant for tax purposes, a super death benefit may have tax deducted on the taxable component up to 15%. If the super death benefit passes directly to the same beneficiary, the tax is up to 17% (because the individual pays Medicare).

Mark
August 26, 2024

Is the 15% tax payable only on the “taxable” portion, otherwise no tax is payable by the beneficiaries? I’m pretty sure the SMSF tax return states the taxable and non taxable portions.

Jon Kalkman
August 22, 2024

The obvious point here is that the authority to pay out a death benefit to the estate of the deceased or directly to legally qualified beneficiaries is belongs to the super fund trustee, and no one else.

In an SMSF, it is therefore important to ensure that there will be a trustee in place to exercise this authority when the time comes. That is obviously critical for single-director corporate trustees. The authority of an Enduring Power of Attorney ceases at death and the Executor of the estate has no authority over a super fund.

If there is no one with the authority to act as trustee, no decisions can be made about the fund and it will require a lengthy and expensive court procedure to unlock the situation. The solution may well be that the Court appoints the Public Trustee to fulfil this function.

Some years ago, my wife and I updated our SMSF Trust Deed so that the Executor of our estate is automatically appointed as trustee of our super fund on our deaths. That way we can be sure that there would always be someone we trust to look after our interests and fulfil our wishes.

Aussie HIFIRE
August 22, 2024

It's a complex area, and consulting with professionals is definitely the way to go. Alas there seem to be a lot of estate planning lawyers who completely ignore clients superannuation and instead just draft a will and powers of attorney, and often not even the latter.

 

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