Unless you are familiar with the area or work within the industry, superannuation benefits are often assumed to be one's asset. Whether it be a retail or self-managed superannuation fund ('SMSF'), it is commonly overlooked as being something that sits outside of a Will and not automatically forming part of one's personal estate on death. This is because the benefits are held in trust on the member's behalf and therefore not directly owned by the member.
How proceeds are distributed comes down to the superannuation legislation, regulations and the governing rules of the superfund. This means that even though a Will may mention how proceeds are dealt with, it does not automatically make it an asset that is subject to the terms of the Will.
The death of a member is a compulsory cashing event. The trustee of the fund ultimately has the discretion on where death benefits are paid which must be to the member's 'dependant' or their Legal Personal Representative (which then allows the executor to deal with the proceeds in accordance with the Will). There are two definitions of 'dependant' as set out below:
Dependant (of the deceased)
|Superannuation Industry||Income Taxation|
|(Supervision) Act 1993 (Cth)||Assessment Act 1997 (Cth)|
|Determines eligibility to receive benefit||Determines tax treatment of benefit|
Depending on the rules of the fund, benefits can be made in the form of a lump sum, pension/income stream (also subject to regulations) or both. A member can execute a 'Binding Death Benefit Nomination' ('BDBN') which directs the trustee as to where and how (depending on the terms of the deed) proceeds are to be paid on their death. Some funds also allow for non-binding nominations to be made and as the name suggests, it is not binding on the trustee.
The BDBN must be completed as prescribed by the terms of the SMSF deed or relevant fund for it to be valid and binding. Generally, these include:
- complying with witnessing requirements;
- using the approved form;
- the trustee providing the member with certain information to ensure that they understand their rights to make a BDBN and whether there are any expiry dates;
- setting out the proportion of benefits to be paid and to who and/or what order;
- complying with any notice and acceptance requirements;
- any other requirements as set out in the deed.
Some of the advantages of having a BDBN include keeping proceeds out of the estate and reducing the risk of a claim on the estate being made by a disgruntled beneficiary, certainty that proceeds will be paid to the intended beneficiary and minimising payment delays.
Like with anything though, not only should the current circumstances be taken into account but consideration should also be given to the succession of control of the SMSF after the death of a member. This also means reviewing other related documents (e.g. company constitution if the SMSF has a corporate trustee) and including provisions under a Will to address the situation where a BDBN might fail and proceeds form part of an estate as a result.
To ensure that one's wishes are carried out on death, all aspects of estate planning should be addressed, not only just the Will and Enduring Power of Attorney but other structures which fall outside of the Will (e.g. trusts) and of course, superannuation. These are all intertwined and when addressed together appropriately, will enable for an effective estate plan to be implemented. Once in place, reviews should be conducted every few years or upon changes in circumstances or a significant event occurring.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.