When we meet with clients to review their estate and succession plan, we always ask the client to provide us with a summary of the following:
- their assets and liabilities;
- their corporate structure – including any businesses they are involved and how the business is structured;
- their family tree – including spouse, children, step-children, children to former deceased spouses; and
- their superannuation.
Also, we ask clients to outline any objectives they may have for their estate plan. Generally speaking, most people already have in mind an idea of who they want to receive what from their estate, prior to us meeting.
One of the critical aspects we see is often overlooked is how superannuation is dealt with upon death.
When someone dies, their superannuation entitlements are made up of the either:
- their member balance (solely); or
- their member balance and sum of the life insurance to which the superannuation funds paid for (combined).
The monies cannot be separated. They are dealt with as a single sum.
Furthermore, superannuation is separate from your estate assets. Therefore, generally speaking your Will does not control who and where you superannuation ends up.
There are a number of ways to deal with your superannuation. However, it is a matter we encourage clients to take accounting, financial and legal advice on. As a matter of process, we ensure that before any decisions are made, there is consultation with our clients other advisors.
Superannuation death benefit paid as a lump sum under a Binding Death Benefit Nomination
An option in relation to your superannuation death benefit is to pay it out via a Binding Death Benefit Nomination. This is a form completed by you nominating a beneficiary.
A Binding Death Benefit Nomination allows your superannuation death benefit to be paid to your nominated beneficiary as a lump sum.
There are two categories of people you may nominate in a Binding Death Benefit Nomination. They include:
- Your legal personal representative – this is administrator or executor of your Will. If you nominate your legal personal representative, the funds will be paid to the administrator or executor of your Will, and held on trust and distributed in accordance with your estate (i.e. under the rules of intestacy if you do not have a Will, or if you have a Will, then pursuant to the Wills of your Will); or
- A superannuation dependent – a superannuation dependent includes your spouse including de facto spouse, child either under or over the age of 18 years, a financial dependent or a person you are in an interdependent relationship with.
Is tax payable by the person I nominate to receive my superannuation death benefit?
Where there is a lump sum payable under a Binding Death Benefit Nomination, it is important to remember that tax may be payable depending on whether the nominated beneficiary is a tax dependent.
It is important to remember that just because you have nominated a superannuation dependent to receive your superannuation death benefit, it does not mean they will be considered a tax dependent as well.
The general rule is that tax will follow the beneficiary.
The following people are eligible to receive your superannuation death benefit tax free and are referred to as ‘tax dependents’:
- spouses including de facto spouses;
- a person you are in an interdependent relationship with (i.e. a girlfriend/boyfriend);
- a financial dependent; and
- a child under the age of 18 years.
Sharon’s husband Geoff has predeceased her. When she completes her estate planning, she only has her two adult sons, John and Alan (ages 48 and 45 respectively) that may survive her.
In her estate planning, Sharon makes a Binding Death Benefit Nomination in favour of her legal personal representative. Sharon also makes a Will nominating John and Alan as joint executors and beneficiaries in equal shares.
Following Sharon’s passing, John and Alan call in Sharon’s superannuation death benefit and it is paid to them as the legal personal representatives of Sharon’s estate.
In this circumstance, as John and Alan are adult children over the age of 18 years, they will be responsible for ensuring a tax return is lodged for Sharon’s estate paying the applicable death benefit tax. This is because the beneficiaries of Sharon’s estate are John and Alan and are over the age of 18 years, and therefore, not tax dependents.
What rate of tax applies if I nominate a non-tax dependent in my Binding Death Benefit Nomination?
If death benefit tax is applicable, it can range between 15 – 32% depending on the taxable and non-taxable components of your superannuation. This is a matter we encourage our clients to discuss with their superannuation advisor or accountant.
Superannuation is a critical aspect of your estate planning that requires careful consideration and planning. If you require assistance with your superannuation planning or estate planning, do not hesitate to contact us.
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