Who decides what happens to your superannuation savings when you die? You may think that you do, but that isn’t always the case.
The ultimate decision may be made by someone you don’t even know: the trustee of your superannuation fund. Let’s look at how you can have greater control.
Binding death benefit nominations
The most certain way to direct payment of your superannuation death benefit is by making a binding death benefit nomination. The nominated beneficiaries must be ‘dependants’ — spouses, de facto spouses, children or financial dependants — or a legal personal representative (ie the executor or administrator of a deceased estate.)
If the nomination has been properly signed and witnessed, and is still current at the date of death, then the trustees of the superannuation fund must pay the death benefit to the nominated beneficiaries.
Unlike wills, valid binding superannuation nominations are unlikely to be overturned by a court (although this has yet to be fully tested), so they provide great certainty. It is up to the trustees of each superannuation fund to decide whether or not to allow binding nominations, so they aren’t available to everyone.
Binding death benefit nominations are only valid for three years, so it is important to ensure they remain up-to-date.
Even when binding nominations are available, many members don’t make use of them. In these cases, even when a member has nominated preferred beneficiaries, it is the trustee that decides who the death benefit will be paid to.
The trustee is under a legal obligation to pay a death benefit to the members’ dependants, and in most cases benefits will be paid in a way that is consistent with the wishes of the deceased member. However, it is possible the trustee may recognise a wider range of dependants than the member would have liked – including a separated spouse, for example.
Given the choice, most people prefer to make a binding nomination. It provides greater certainty. If the benefit is paid to an estate, flexibility can be provided through the terms of the will. For example, the superannuation proceeds can be used to set up a testamentary trust, which may provide some tax advantages to beneficiaries.
In some cases, the member’s preferred beneficiary may not meet the legal definition of a dependant. This may apply to parents, for example. In the absence of any dependants and a legal personal representative, the trustee may exercise their discretion, and pay the benefit to a non-dependant.
The situation is a little different if the member has already retired and is drawing a superannuation pension. With pensions, it is common to nominate a surviving spouse as a reversionary beneficiary. This means the pension payments will continue to be paid to the nominee, either until their death, or until the funds run out. If the reversionary beneficiary dies, any remaining balance is then paid out as a lump sum death benefit according to the type of nomination they have made.
Good advice required
Increasing levels of wealth being held via superannuation, and the nomination of beneficiaries, should be made in the context of a comprehensive estate plan. This includes taking into account the way superannuation death benefits are taxed when paid to different types of beneficiary. Your financial planner can help you make the right decision.