Considering your superannuation is an important undertaking when looking at your estate planning.
To avoid unintended consequences, it is crucial that you understand how your superannuation death benefits will be dealt with upon your passing.
We have debunked four myths we often encounter when it comes to your superannuation:
The first myth is that if you have a Will in place, your superannuation is looked after and will be distributed in accordance with your Will.
This is not true.
Superannuation is a non-estate asset. The starting position, is that the trustee of your superannuation fund is responsible for distributing your superannuation funds (also known as your death benefits).
Unless the trustee of the superannuation fund determines that the death benefits are to be paid to the legal personal representative of your estate (e.g. your executor), the funds do not form part of your estate and are not controlled by your Will.
The second myth is that your beneficiary nomination is binding on the trustee of the superannuation fund.
This is not always the case.
As a general rule, there are two types of nominations that can be made:
- a non-binding nomination; and
- a binding nomination.
The difference between the two is significant and can have a profound impact on your loved ones.
A non-binding nomination is a nomination which the trustee of the superannuation fund will only take into consideration when determining who should benefit from your superannuation funds.
For example – a deceased may have nominated all of their death benefits to be divided equally between their children; however, the deceased also had a de facto spouse.
In this example, if the deceased had a non-binding nomination in place, the trustee may choose instead to distribute the death benefits to the surviving de facto spouse.
Payment by the trustee of the death benefits is entirely at the trustee’s discretion. Whilst a non-binding nomination is considered by the trustee of the superannuation fund, the decision is not binding.
A binding nomination on the other hand, is a nomination which the trustee of the superannuation fund must honour.
Applying the same example above, a binding nomination would have ensured that all of the deceased’s benefits were divided equally between the deceased’s children.
Generally, a binding nomination will only last 3 years before it must be renewed. Sometimes, if you fail to renew your binding nomination, it will revert to a non-binding nomination.
The third myth is that you can nominate whomever you wish to receive your death benefits.
Again, this is not true.
There are only 5 eligible beneficiaries you may nominate to receive your superannuation death benefits:
- your spouse or de facto partner;
- your children of any age, including step-children, adopted or children from previous relationships;
- someone who is financially dependent on you;
- a person in an interdependency relationship with you – i.e. a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other; or
- the legal personal representative of your estate – i.e. your executor with your death benefits to be distributed in accordance with your Will.
If you nominate a person who does not fall within the above list, such as a parent, grandchild niece/nephew, cousin or friend – unfortunately, your nomination will be invalid.
The fourth myth is that there will be no tax consequences when it comes to your beneficiaries receiving your death benefits.
This is not always the case. It will depend on whether your beneficiary is considered a tax dependent.
Where death benefits are paid to a ‘tax dependent’, it is paid tax free. A ‘tax dependent’ includes:
- your spouse or de facto spouse;
- your former spouse or de facto spouse;
- your children including stepchildren, adopted or children from previous relationships under the age of 18 years;
- a person who is financially dependent on you; or
- a person with who you have an interdependency relationship with.
If you nominate one of the above, any superannuation death benefit they receive is tax free.
What should I do to avoid any issues when it comes to my superannuation?
Always review your estate plan and ensure it is up to date. Any significant changes in your assets and personal/financial circumstances, should prompt a review.
If you are unsure whether you have a superannuation non-binding or binding nomination in place, contact your superannuation fund.
If in doubt, contact us and we can guide you through your options to determine the best method for the distribution of your superannuation death benefits and work it into your estate plan.
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