When considering your estate planning and your entire pool of assets, your superannuation may be one of your largest assets to consider.
However, your superannuation is not an estate asset unless the trustees of your superannuation fund pay your superannuation death benefits to your legal personal representative (the executors of your estate).
The trustees of your superannuation fund, whether it is regulated fund or a self - managed fund, may distribute your superannuation death benefits either:
If the fund allows one and you have a valid binding death benefit nomination in place, in accordance with your nomination; or alternatively;
If you do not have a valid binding death benefit nomination in place, at their discretion to either a “dependant” of you or to your “legal personal representative” (the executors of your estate) for distribution in accordance with your Will.
Your “dependant” is your spouse, your child or anyone whom you have an interdependency relationship with.
To ensure the trustees distribute your superannuation death benefits in accordance with your wishes, it is often but not always, recommended you prepare a binding death benefit nomination. Care needs to be taken to ensure your binding death benefit nomination is regularly updated, and if necessary, renewed to ensure it is valid.
In your binding death benefit nomination, you may only nominate your dependants (as defined above) or your legal personal representative (the executor of your estate) to receive the death benefits.
How you decide to distribute your superannuation death benefits is a personal matter. When considering who to distribute your superannuation death benefits to there are a number of issues to consider with varying importance depending on your individual circumstances. What is important to you may not be as significant to another person. Relevant issues generally include but are not limited to:
The size and nature of your entire estate;
Your age and whether you are in accumulation phase or you are in pension phase;
The most tax effective way to distribute to your intended beneficiaries, including:
Who your intended beneficiaries either a spouse or children or dependant;
The age of your intended beneficiaries. If they are over 18 years of age whether or not, they are considered a death benefits tax dependant;
Any capital gains tax consequences of realising assets supporting a pension;
The competing interests of your intended beneficiaries;
How you wish your intended beneficiaries to receive your death benefit either as a lump sum, pension, reversionary pension or death benefit income stream;
Whether a reversionary pension is appropriate;
Your overall estate plan.
Depending on your individual circumstances, there can be certain advantages, both from a taxation and strategic point of view, in distributing your superannuation death benefits in a particular way depending on who your intended beneficiaries are.
If you have a binding death benefit nomination in favour of your legal personal representative or alternatively without a nomination your trustees exercise their discretion to distribute to your legal personal representative, your superannuation death benefits will form part of your estate for distribution in accordance with your Will. Depending on your individual circumstances, this may or may not be the best strategic choice for you. For example:
Your superannuation death benefits may then be subject to a claim for further provision where they otherwise would not be;
However, if you have children under 18 years of age and have set up a testamentary discretionary trust, it may be advantageous to have all of your estate and superannuation funds together and controlled by trustees you choose with the income incurring a lower taxation rate;
In a blended family situation, where you intend to provide for your own children from a previous relationship but also wish to benefit your new spouse, you may create a trust for your second spouse to receive income (and possibly some capital) and your children to receive the capital. This approach may remove your superannuation from a concessionally taxed environment and/or open your estate up to challenge by a family provision claim but may better if your overall intention is to preserve capital.
You may decide in considering your overall estate plan, it is more appropriate to have your superannuation paid directly to your death benefits tax dependants being a spouse, children under 18 years or adult children who remain financially dependent on you, and then gift part or all of your estate to non-death benefits tax dependants. For example, leaving a significant gift to your adult children (who are not death benefits tax dependants) in your Will and leaving your superannuation to a death benefits tax dependant. This approach may risk a claim for further provision from your estate, however that risk may be small depending on your individual circumstances particularly given the Court would consider any superannuation payment when determining if someone has a need for further provision.
Whilst preparing a binding death benefit nomination is generally the preferred and recommended approach, you may also consider it is more appropriate for you not to have a binding death benefit nomination in place and leave the decision regarding the payment of your superannuation death benefits to the trustees’ discretion depending on your individual circumstances at the time. Obviously this would only be appropriate if you were confident the trustees would exercise their discretion in a manner acceptable to you at the time.
Please note, the above are only some examples of different superannuation options and strategies. Most options and strategies come with advantages and disadvantages depending on your individual circumstances and the applicable superannuation legislation and regulations at the time. There needs to be a balance between your intention and desire for a particular outcome and the risks involved and the taxation benefits of taking such an approach. Either way, superannuation is an important part of your estate planning and obtaining advice based on your individual circumstances is essential.