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When you have a valid Will in place when you die, most of us assume our executors will take care of all the necessary paperwork and just distribute our assets to our chosen beneficiaries in the proportions listed in our Will.
But when it comes to your super, it’s not that simple. Your Will doesn’t automatically decide who gets your retirement savings; it’s up to the trustee of your super fund to make the final decision.
If you want to ensure you have a say in who gets your super when you die, you need to learn what to do to ensure your wishes are respected.
You don’t own your super assets
When you make a valid Will, it governs the distribution of the assets you own personally, like your house, car, and bank accounts. What a lot of people don’t realise is that 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 of your super fund is the one who gets to make the decision about who receives your super death benefit. The trustee has a broad discretion when it comes to who your death benefit is paid to and it may not be the person you would have selected.
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 super funds, your written nomination can bind the trustee so it is required to carry out your wishes.
Who are my dependants under super law?
If you want to nominate specific beneficiaries to receive your death benefits, you need to make a valid death benefit nomination.
A key rule for making a valid death benefit nomination is you must nominate one or more of your dependants under super law, or your Legal Personal Representative (LPR).
Superannuation law considers a person to be your dependant if – at the time of your death – they were:
- Your spouse or de facto spouse, including same sex
- One of your children of any age
- In an interdependency relationship with you
- Financially dependent on you (a dependant in the ordinary sense of the word).
Under super law, you are in an interdependency relationship if you and the other person live together, have a close personal relationship and at least one of you provides the other with financial support, domestic support and personal care. For more details on interdependency relationships, see the ATO website here.
Estate planning and death benefit nominations
A valid death benefit nomination is an important part of managing how your estate will be distributed after your death.
Estate planning is a general term used to describe the process of organising your financial affairs so your wealth is efficiently distributed in a tax-effective manner to your chosen beneficiaries. It includes having properly documented and valid Wills, enduring powers of attorney and testamentary trusts in place.
Even if you’re not wealthy, your estate plan should be regularly reviewed to ensure it considers your changing family situation (such as divorce or a new family member), financial assets and relevant legislation.
If you have an SMSF, having an effective estate plan in place is even more important to ensure your wishes are carried out.
Superannuation Proceeds Trusts (SPTs)
One estate planning issue to consider is whether the Will should establish a Superannuation Proceeds Trust (SPT). This is a testamentary trust that is specifically designed to hold superannuation death benefits.
An SPT may be appropriate if there is concern a beneficiary may overspend their inheritance, as the appointed trustee will control the amount and frequency of distributions from the SPT.
An SPT may also reduce tax on the earnings of the benefit for minor children who are beneficiaries.
All beneficiaries of an SPT must be dependants under tax law – see our guide to tax on super death benefits.
4 types of death benefit nomination
When nominating the beneficiaries you would like to receive your super death benefit, you need to correctly fill in the necessary paperwork to ensure you provide clear instructions for the trustee of your super fund. If your nomination is not deemed valid, the decision on where your money goes will be made by the trustee.
Your benefit nomination can be renewed, changed, or revoked at any time.
There are four main types of death benefit nomination offered by super funds. It’s important to understand the differences so you choose the one most suitable for your personal situation:
1. Non-binding nomination
This is the most common type of death benefit nomination and is offered by most super funds. With this type of nomination, the trustee of your super fund will look at the nomination you make, but it still retains the final say over which of your beneficiaries receives your super and in what proportions.
Having the discretion to consider factors such as your personal relationships and circumstances when you died means the trustee may distribute your benefit differently from the nomination you made. The trustee may do this if it deems it appropriate, such as if you have a new spouse or a different financial situation from when you made the nomination.
It can take time for the trustee to make a death benefit decision. Your beneficiaries may not receive the money for many months if the trustee needs to investigate your personal circumstances to make a decision.
The trustee may also decide to pay your death benefit directly to your LPR. If this occurs and you don’t have a valid Will, your super death benefit and the rest of your estate will be distributed as required under the intestacy laws applying in your state.
You can make a non-binding nomination using a paper form or online, and it does not need to be witnessed.
2. Lapsing binding death benefit nomination (BDBN)
If you make a valid BDBN, the trustee of the fund must pay your super death benefit to the beneficiaries you nominate, in the proportions you listed in your nomination. A binding death benefit nomination overrides the normal trustee discretion on payment of a super death benefit.
Lapsing BDBNs expire after three years unless they are renewed. If you don’t renew your BDBN, your fund trustee will consider you have made a non-binding death benefit nomination and will have the final say over which of your beneficiaries receives your super and in what proportions.
The BDBN rules applying to members of an SMSF are different (see SMSF section below).
A BDBN provides certainty about the distribution of your benefit, which can be useful for tax planning and broader estate planning. For example, beneficiaries eligible to receive super tax-free could be nominated while other dependants receive alternative assets.
Having a BDBN can also speed up the process of paying out your super death benefit. If your beneficiaries need money quickly (such as to pay a mortgage or school fees), a BDBN can allow the trustee to pay out your death benefit promptly, as it does not need to determine the correct distribution.
3. Non-lapsing binding nominations
A non-lapsing BDBN does not expire. It remains in place until you cancel it or replace it with a new binding death benefit nomination.
This means you do not need to update your death benefit nomination in writing every three years. With a lapsing BDBN, if you forget to renew your nomination, your super fund trustee once again is given discretion to decide who receives your super death benefit (and any life insurance in your super account).
Non-lapsing BDBNs are only rarely offered by funds other than SMSFs, so you need to check with your fund to see if this option is available to you. If you have an SMSF, see the SMSF section below.
4. Reversionary nomination
If you receive a super pension or income stream, some super funds allow you to make a benefit nomination so the income stream will automatically revert to a particular beneficiary – usually your spouse – on your death.
With this type of death benefit nomination, the fund trustee is required to continue paying the super pension to your beneficiary if your benefit nomination is valid. This can be a simple way to ensure your spouse receives your death benefit, as the trustee has no discretion to direct the benefit payment.
Usually, reversionary nominations can only be made when you start a super pension, so if you already have pension in place you may need to stop and restart it to make it reversionary.
SMSFs and binding death benefit nominations
If you are an SMSF member and want to make a BDBN, you need to check your fund’s trust deed to see if it allows this type of benefit nomination, as not all SMSF trust deeds permit them. To be valid, your nomination also needs to be in line with the governing rules of the SMSF.
In June 2022, the High Court handed down a decision in Hill v Zuda Pty Ltd that changed the rules for SMSFs in relation to BDBNs. The Court decided regulation 6.17A of the SIS Regulations does not apply to BDBNs made for an SMSF member.
This means an SMSF, if the fund’s trust deed allows, can have a BDBN that does not lapse every three years and does not need to be witnessed by two people.
SMSF trustees should always check the fund’s trust deed when a member makes a BDBN to ensure their nomination is valid and will bind the trustee when dealing with the member’s death benefit. Following Hill v Zuda, all SMSFs should review any existing BDBNs made by members to ensure they remain appropriate and in line with the fund’s trust deed.
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