Many people are unaware of what happens to their superannuation on death. Unlike other assets, the balance of your member account in your superannuation fund does not necessarily pass to the beneficiaries under your Will.
Who can I nominate to receive my superannuation member’s account?
Most superannuation funds allow you to nominate any of the following persons to receive the balance of your superannuation member account:
- Your spouse.
- Your children including step-children and adopted children.
- Your legal personal representative (the executor of your estate).
- Your former spouse.
- Anyone else who is your dependant at your death.
The ultimate destination of the balance of your member account in your superannuation fund is decided in the superannuation trust deed in conjunction with any death benefit nomination or death benefit rule that you have signed.
The balance in your member account will be transferred entirely at the trustees’ discretion if you do not have a death benefit nomination or death benefit rule.
Death benefit nominations
Death benefit nominations can be binding or non-binding.
Binding death benefit nominations are binding on the trustee. This means that the trustee is required to pay the balance of your member account to the beneficiaries in your death benefit nomination. The advantage of this approach is that this reduces the potential for legal disputes over your member account following your death. However, a binding death benefit nomination may be inappropriate for some people, particularly where flexibility is required.
Under some superannuation trust deeds binding death benefit nominations expire every three years. Therefore you should check this point in your trust deed. Usually, the deed of a self-managed superannuation fund can be amended with the consent of the trustees to allow binding death benefit nominations to last indefinitely.
A non-binding death benefit nomination is not binding on the trustee. However the nomination must be taken into account by the trustee when deciding who should receive the amount in your member account. Non-binding death benefit nominations can be helpful for example where uncertainty exists about the most tax effective way of dispersing your member account.
The following example illustrates why a non-binding death benefit nomination may be helpful.
Tina and her sister Kate are the members and Trustees of their self-managed superannuation fund. Tina has always trusted Kate to make sensible decisions.
Tina completes a non-binding death benefit nomination as follows:
50% to her husband David
50% to her son Jack who has a permanent disability
Tina deliberately completed a non-binding nomination. This is because Tina’s marriage to David is her second marriage and Tina does not know if the marriage will last. Jack is Tina’s son from her first marriage. Jack is unwell at times and Tina does not know if David would care for Jack if she died. Jack may have a limited life expectancy. Tina’s mother has no assets and lives solely on the Centrelink Age Pension. Tina may want to leave some of her member account to her mother, Ann, particularly if Jack predeceases her or if her marriage fails.
Trustees on death or incapacity
If you have self-managed superannuation fund (SMSF), you should consider who would replace you as trustee of your superannuation fund if you died or lost legal capacity.
All SMSF must have at least two trustees or a company trustee. For SMSF’s with two to four members, the members of the SMSF will be trustees of the SMSF or directors of a company which is the trustee of the SMSF.
Single member funds must have either:
- Two individual trustees, one of whom is the member and the other is a relative of the member.
- Two individual trustees, one whom is the member and the other is not an employee of the other trustee.
- A company trustee of which the member is a director. The company may also have a second director who is not an employee of the member.
On your death, your legal personal representatives (executors) may become the trustees of the SMSF, subject to the SMSF’s deed. The legal personal representatives can act as trustees from the member’s death until the pay-out of the member account commences.
Tina sadly dies. Kate and David are joint executors under Tina’s Will, and thus Kate and David replace Tina as trustee of the SMSF. Until the death benefit commences, Kate and David act as one trustee and Kate acts as the other trustee of the SMSF. Jack’s health has improved and Ann has offered to care for Jack. Kate and David decide to convert the whole of Tina’s member account to a pension for Tina’s son Jack for life. Once the pension commences, Kate and David can no longer continue as trustees in place of Tina, because the death benefits have commenced. Jack cannot act as trustee because he does not have legal capacity to do so. Tina and Kate’s mother, Ann, is Jack’s guardian and legal personal representative. She (Ann) is appointed to act as Trustee with Kate because Jack cannot be a trustee. David has no legal right to act as trustee from that point forward.
A legal personal representative of a member who has an enduring power of attorney in respect of the member may also act as a trustee or director of the company trustee of an SMSF in place of the member during any period covered by the power of attorney.
Prior to Tina’s death she was gravely ill for six months and in practice she was unable to perform her duties as trustee of the SMSF. Tina had given a joint power of attorney to her sister, Kate, and her mother, Ann. During the six months leading up to Tina’s death, Kate and Ann became trustees of the SMSF in place of Tina.
This article highlights some of the complexity surrounding estate planning and your superannuation fund. You should take the time to consider who should be:
- The beneficiaries of your member’s account within your superannuation fund.
- The trustees of your superannuation fund in the event of your death or incapacity.
Please contact me if you have any questions or require advice in respect of your superannuation circumstances.
Tax and Superannuation Consultant
Phone: 02 6279 5400