Death benefits Q&A: Part 1

How do I ensure that my superannuation goes to the beneficiaries I nominate?

Answer

There are several ways to give you certainty that your super benefit will be paid to your nominated beneficiaries and/or your legal personal representative.

If you are a member of an industry or retail super fund, find out if they provide you with a binding death benefit nomination. This directs the trustee of your fund to act as you have instructed to pay your super to your dependants at the time of your death and/or your legal personal representative who is usually the executor of your estate. The trustee is legally bound to pay a proportion of your benefit to whoever you direct in that nomination. If you nominate that your death benefit should be paid to your legal personal representative, usually the executor of your estate, then the benefit must be distributed to your beneficiaries as indicated in your Will.

If you are a member of a self-managed super fund (SMSF) you are also able to make a binding death benefit nomination, which legally binds the trustee to distribute your super as you have directed to your dependants and/or legal personal representative.

In addition, it is possible with an SMSF that the fund’s trust deed appoints someone in your place, such as your legal personal representative, as trustee or director of the corporate trustee to ensure your death benefit is distributed as you have directed.

Question 2 – Direct nomination or legal personal representative

Is it better to nominate beneficiaries through direct nomination or through (the member’s) estate and their Will?

Answer

The answer to your question depends on a number of factors.

Under the superannuation legislation death benefits are required to be paid to either or both your dependants at the time of your death and/or to your legal personal representative who is usually the executor of your estate. Dependants at the time of your death include your spouse and children of any age, someone with whom you are in an interdependency relationship with or a person who is ordinarily dependant on you for support at the time of your death.

As a rule, death benefits paid to dependants are tax free, however, there is one exception – children who are older than 18 who are required to pay tax on the ‘taxable component’ of the death benefit they receive. The tax-free status of your death benefit continues to apply to children over 18 who are disabled or where the child over 18 receives the death benefit because you are a member of the defence force, for example, and have ‘died in the line of duty’. Where the death benefit is paid to your legal personal representative and distributed to your child over 18 via your estate, no Medicare levy is payable on the taxable component of the amount they receive.

Question 3 – Pros and cons of nominating your legal personal representative

What are the advantages and disadvantages of nominating your estate as the nominated beneficiary?

Answer

If you nominate your legal personal representative, your death benefit will be paid to your estate and distributed to your beneficiaries according to your Will.

If your super benefit is paid to a dependant for superannuation purposes such as your surviving spouse, child under 18, person with whom you have an interdependency relationship or is dependent on you for support at the time of your death, then no tax is payable.

However, if your death benefit is paid to a child older than 18, with some limited exceptions, the child pays 15% tax plus 2% Medicare on the taxable component of your death benefit which is calculated at the time of payment from the fund. The limited exceptions where no tax is payable on the benefit apply to a disabled child older than 18 or to your children who received the death benefit as a result of you passing in the line of duty such as a member of the armed services or emergency services.

Where the death benefit is paid to a child over 18 via your estate, tax is paid on the taxable component at the rate of 15% as a general rule and is not subject to Medicare. That is, an adult child may pay less tax this way.

The main disadvantage of paying the death benefit to the legal personal representative is that it opens up the distribution of the benefit to the beneficiaries of the member’s estate. The beneficiaries under the estate could include anyone mentioned in the will and may include others who wish to challenge it. By comparison, the distribution of the death benefits via your super fund is limited to dependants of the deceased as defined in the superannuation legislation.

Question 4 – Death benefit nominations and the trust deed

Does a valid death benefit nomination take precedence over the trust deed (should the nomination not be in line with death benefits payments clauses in the deed)? A member without a reversionary pension has passed away. The surviving member wishes to take over the pension (per the current death benefit nomination). That is, he wants the pension to revert to himself.

Answer

The fund’s trust deed sets the boundaries for the terms of the death benefit nomination which is authorised by the deed. To be consistent with the trust deed any binding death benefit nomination must stay within those boundaries otherwise it may be considered invalid.

If a member was in receipt of a non-reversionary pension it comes to an end on the death of the member. If the deceased member has nominated someone else who is a member of the fund to receive their death benefit, they must qualify as a dependant under the superannuation law. If that is the case, and if the trust deed permits, it will be up to the member to request the commencement of a new pension.

Paragraph 29 of Taxation Ruling 2013/5 says that:

Death of a member

29. A superannuation income stream ceases as soon as a member in receipt of the superannuation income stream dies, unless a dependant beneficiary of the deceased member is automatically entitled, under the governing rules of the superannuation fund or the rules of the superannuation income stream, to receive an income stream on the death of the member. If a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member’s death, the superannuation income stream continues.

As it would appear from your question that there is no automatic entitlement to receive the pension on the member’s death as it is non-reversionary, the recipient would need to start a new pension.

Question 5 – Taxation of benefits for adult children

Is nominating your legal representative as the defined death benefit recipient the best way to avoid any tax obligations for your adult children?

Answer

See Question 3. When a death benefit is paid to a child over 18 the taxable component of the benefit is taxable. The tax rate is 15% plus 2% Medicare if it is paid directly from the fund to the child.

If the death benefit is paid to the legal personal representative of the deceased and distributed to an adult child via the estate of the deceased, then tax of 15% tax is payable on the taxable component. However, no Medicare is payable.

Question 6 – What happens if a beneficiary dies before me?

If a member makes a binding death benefit nomination (BDBN) to their two children, say 50% benefit each, and one child dies, does this make the whole BDBN invalid? Or does the remaining child receive 100% of the benefit on death of the member?

Answer

Whether the remaining child receives 100% of the benefit on the death of the member, if one child pre-deceases the member, will depend on the wording of the binding death benefit nomination (BDBN). If the fund rules permit, the member’s BDBN could direct the trustee to pay the 50% of a pre-deceased child’s benefit to the surviving child or to another dependant and/or to the legal personal representative of the deceased.

Question 7 – Leaving super to your spouse and keeping it in the super system

If you want to leave your super to your spouse and keep it within the super system, are you best to make the spouse the beneficiary rather than the legal personal representative? Can the fund give the choice to pay out in cash or keep in the super fund?

Answer

If a death benefit entitlement is made to the surviving spouse, it is possible for the spouse to retain the death benefit in the fund. However, any death benefit retained in the fund must be paid to the surviving spouse as an account-based pension. The capital sum used to commence the pension, including other pensions commenced by the surviving spouse, are required to remain within his or her Transfer Balance Cap.

If the death benefit is paid to the deceased member’s legal personal representative via their estate, it will leave the superannuation system.

Question 8 – Can a trust be a beneficiary?

Can nominated beneficiaries be a trust e.g. a disability trust?

Answer

No. Under superannuation law, death benefits must be distributed to either or both your dependants and/or legal personal representative (usually the executor of your estate) at the time of your death.

Dependants at the time of your death include your spouse and children of any age, someone with whom you have an interdependency relationship or a person who is ordinarily dependant on you for support at the time of your death.

It is not possible to nominate a disability trust as death benefit beneficiary as beneficiaries are limited to individuals such as dependants and/or the member’s legal personal representative.

Question 9 – Binding death benefit nominations

I live in NSW and our SMSF is registered in NSW. What is the regulation with our binding death benefit nominations as to frequency of updating them if there are no changes to them? And, a technical matter… is it necessary to do one for each pension account if a member has multiple pension accounts?

Answer – part 1

A death benefit nomination is a formal nomination by a member to the trustee of a super fund as to who the intended beneficiary of their superannuation benefits will be upon their death. Depending on the terms of the super fund deed, the nomination can be binding or non-binding and lapsing or non-lapsing. If the death benefit nomination is a lapsing nomination, it would require renewal prior to the date on which it lapses. If the death benefit nomination is non-lapsing, there is no requirement to update it unless you wish to change the terms of the death benefit nomination.
 
Before making a death benefit nomination, the trust deed of the fund should be reviewed to check whether nominations are allowed and ensure the proposed form is appropriate and complies with the requirements of the fund. Most retail and industry funds will have a nomination form that must be completed and so it is best to ask for that nomination form rather than prepare something bespoke.

The SIS Act and SIS Regulations permit a trust deed to contain provisions enabling a member to make a binding death benefit nomination. The trust deed of a fund with more than six members may adopt the formal requirements for binding death benefit nominations for a non-self-managed fund which are set out in SIS Regulation 6.17A. Some of the key formal requirements are below:
 
(i) The trustee must provide sufficient information to ensure the member understands their right to make a binding nomination.

(ii) The nominees must be dependants or the legal personal representative (that is, the executor or administrator of the estate).

(iii) The proportion payable to each nominee must be certain.

(iv) The nomination must be in writing, signed by the member in the presence of two witnesses who are over 18 and not mentioned in the nomination.

SIS Regulation 6.17A also states that unless revoked by the member, a binding death benefit nomination will lapse after three years or such shorter period as the fund’s deed may specify (but note this does not apply to self-managed super funds).
 
It is important to be aware that the trust deeds of some retail super funds permit members to make non-lapsing beneficiary nominations which are expressed not to lapse after three years. These nominations may or may not be legally binding on the trustee – it depends on the terms of the applicable trust deed.

Self-managed super funds (SMSFs) may have a nomination form annexed to the trust deed and will almost certainly have the requirements for the nomination set out in the body of the trust deed. It is therefore important to review the trust deed carefully.

Answer – part 2

There is no requirement for a binding death benefit nomination to be made for each pension a person has in place as well as another one for their accumulation phase assets. The wording of the nomination will usually refer to how the superannuation benefit, that is the total benefit in the fund, will be allocated. However, if a member of an SMSF wishes to nominate that a particular beneficiary receives the proceeds of a particular pension or the member’s accumulation phase balance, they can do so by having a bespoke binding death benefit nomination drafted by a specialist lawyer.