If you have a valid will in place when you die, most of us assume it’s simply a matter of our executors taking care of all the paperwork and paying out our remaining assets to our beneficiaries in the proportions listed in the will.
But in fact, when it comes to your super account, what you state in your will doesn’t necessarily decide who gets your retirement savings, as the trustee of your super fund is not required to take your wishes into account.
This means you need to ensure you nominate a beneficiary if you want a say in who gets your retirement savings after you die.
Who decides where your super goes?
When you make a will, it governs the distribution of assets you own personally, like your house, car and bank accounts.
However, what a lot of people don’t know is, you don’t own your super account personally. It’s held in trust for you by the trustee of your super fund.
Under Australia’s super laws, the trustee is the one who gets to make the decision about who receives your super death benefit.
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To help guide the trustee on who you would like to receive your death benefit, most super funds encourage you to fill in a form and legally nominate your desired beneficiary. In some cases, it can bind the trustee to follow your wishes.
Did you know?
The distribution of your super death benefit is only governed by the terms of your will if it’s paid to your estate or personal legal representative (PLR).
This usually only occurs if the fund trustee uses its discretion to do so, or if you have made a valid binding death benefit nomination (BDBN) requesting the fund to distribute your super death benefit in this manner.
Who are my dependants under super law?
To make a valid death benefit nomination, you can nominate one or more of your ‘dependants’ under super law.
Super law considers a person to be the dependant of a deceased super fund member, if at the time of their death, they were:
- their spouse or de facto spouse, including same sex
- one of their children of any age
- in an interdependency relationship with the person.
Under super law, you are considered to be in an interdependency relationship if you and the other person live together, have a close personal relationship, and one or each of you provides the other with financial support, domestic support and personal care. For more information on dependants under super law, see the ATO website here.
Did you know?
There are different definitions for who is deemed to be a dependant under super law and tax law.
Super law governs who’s eligible to receive a super death benefit from a super account, while tax law determines how much tax the beneficiary will be required to pay.
The amount of tax paid by the beneficiary of your super death benefit will depend on whether the beneficiary is a ‘tax dependant’ and whether your super is paid as a lump sum, income stream or mixture of both.
For more information about tax and super death benefits, see SuperGuide article A simple guide to what tax is payable on super death benefits.
What death benefit nominations are available?
When it comes to nominating the beneficiary you would like to receive your super death benefit, it’s simply a matter of filling in a form and submitting it to your super fund.
Your benefit nomination can be renewed, changed or revoked at any time.
There are several types of death benefit nominations offered by super funds and it’s worth understanding them so you can select the one most suitable for your personal situation:
1. No nomination
If you do not make a death benefit nomination, the trustee of the super fund may decide to pay your death benefit to your estate, or it may use its discretion to decide which of your eligible beneficiaries receive the death benefit.
2. Non-binding nomination
These are the most common type of death benefit nominations and are offered by most industry, retail and corporate super funds.
With this type of nomination, the trustee of your super fund considers the benefit nomination you make, but the trustee retains the final say over which of your beneficiaries receives your super and in what proportions.
This allows the trustee to consider factors such as your personal relationships and circumstances when you died. It may then make a different distribution to your nomination if it deems this is necessary (such as if you have a new spouse, a different financial situation or if your beneficiary is bankrupt).
It can take time for the fund trustee to make a death benefit decision. Your beneficiaries may not receive your death benefit for many months if the trustee needs to investigate your personal circumstances.
The trustee may also decide to pay your death benefit directly to your legal personal representative (the executor of your estate). If you don’t have a valid will, your super death benefit and the rest of your estate will then be distributed as required under the intestacy laws applying in your state.
When you make no benefit nomination or make a non-binding nomination and the trustee of your super fund uses its discretion to decide how to distribute your super death benefit, disputes can arise about who is selected as the beneficiary.
These disputes are often protracted and may need to be resolved by the Australian Financial Complaints Authority (AFCA), which is a government body responsible for mediating or making a final decision on the distribution of super death benefits.
AFCA is not responsible for disputes over the distribution of a deceased SMSF member’s super death benefit, so these need to be resolved by going through the courts.
3. Binding death benefit nomination (BDBN)
If you make a valid BDBN, the trustee of your super fund must pay your super death benefit to the beneficiaries you nominate, in the proportions you listed. A binding death benefit nomination overrides the normal trustee discretion on payment of a super death benefit.
BDBNs normally lapse after three years unless they are renewed. If you do not renew your BDBN, your super fund will consider you do not have a death benefit nomination in place.
If you are a member of an SMSF and want to make a BDBN, you need to check the trust deed of the SMSF to see if it allows this type of benefit nomination, as not all trust deeds permit them. To be valid, your nomination also needs to be in line with the rules of the SMSF’s trust deed.
A BDBN can be useful if you have concerns that your wishes in relation to the distribution of your super benefit might not be carried out when you die, or made in the proportions you wish. This may occur in situations such as blended or second families, or where you have responsibilities for a disabled child.
Valid benefit nominations
To be valid, a death benefit nomination must made in writing, signed and dated by you and appropriately witnessed.
Most super funds have a form on their website you can download, sign and return to the fund to create a valid death benefit nomination.
The beneficiary you nominate in a benefit nomination must meet the definition of a super dependant at the time of your death for the nomination to be valid. If your benefit nomination is made to a non-dependant (such as an ex-spouse, friend or grandchild not financially dependent on you) at the time of your death, this can make your nomination invalid.
Having a BDBN can also speed up the process of paying out your super death benefit.
If your beneficiaries need money quickly, for example, to pay a mortgage or school fees, a BDBN can allow trustees to pay out your death benefit in a more timely manner, as they do not need to determine the correct distribution.
4. Non-lapsing binding nominations
A non-lapsing BDBN normally never expires and remains in place until you cancel it or replace it with a new benefit nomination.
This means you do not need to update your death benefit nomination in writing every three years. With a normal BDBN, you face the risk you could forget to renew your nomination every three years, resulting in the trustee once again having the discretion to decide who receives your super death benefit (and any life insurance in your super account).
Non-lapsing BDBN are not offered by every super fund, so you need to check with your fund.
5. Reversionary nomination
If you own a super income stream, some super funds allow you to make a benefit nomination so the income stream ‘reverts’ to a particular beneficiary, usually your spouse.
With this type of benefit nomination, the trustee will be required to continue paying the super pension to your beneficiary if the nomination is validly made. Usually, reversionary nominations can only be made when you start a super pension, so if you already have one in place you may need to stop and restart the pension.
Stopping and restarting a super pension can have significant implications and could affect your eligibility for social security benefits or your level of aged care fees. Always seek advice from a licensed professional such as an independent financial planner, before making any decision.
For more information, see SuperGuide article Reversionary pensions: What they are and how they work
If you make a benefit nomination, regularly review your nomination – preferably annually – to ensure it’s still right for your current personal circumstances.
When you make a valid BDBN, the trustee of your super fund is required to follow it, even if it is no longer appropriate. So, for example, if you are separated but not yet divorced, and your former spouse is nominated as your beneficiary, the trustee will pay your death benefit to your former spouse unless you amend or revoke your benefit nomination.
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