Who inherits your super?

Clients have many misconceptions around their superannuation and this can impact on how they plan for the future. The right questions can prompt a broader conversation on the benefits of estate planning.

Many clients naturally assume that their superannuation will be paid in accordance with their will. However, this is not necessarily the case and Hau Nguyen, Director of Renaissance Wealth Advisors suggests it should be made explicit early on that superannuation benefits do not automatically form part of the client’s estate.

“When a person passes away, in most cases their super provider pays their remaining super and insurance benefits to their nominated beneficiary,” he says.

“The superannuation benefits are not part of the person’s will unless the person nominates the estate as the beneficiary to receive the benefits under the Binding Death Nomination.”

Most super funds will provide you with the choice of binding, non-binding or no nominations when it comes to selecting your beneficiaries. It is important to understand these choices because the type of nomination you select may give you greater control over the distribution of your super benefits.

Binding nomination

  • The trustee of the fund must pay your super to the beneficiaries you have nominated, in compliance with the instructions given, provided it satisfies all legal requirements.
  • There are lapsing and non-lapsing binding nominations. Lapsing nominations usually expire every three years unless you renewed prior, while non-lapsing nominations never expire.

Non-binding nomination

  • The trustee of the fund will have the final say over which beneficiaries receive your super and in what proportions.

No nomination

  • Depending on the product, if you do not make a nomination the trustee will pay your death benefit to your estate or use its discretion to determine which eligible beneficiaries the money should go to.

Right asset, right beneficiary

Nguyen suggests this becomes part of a broader conversation with the client on the need for estate planning to ensure that, upon passing, the right asset goes to the right beneficiary in the most tax-effective manner.

“It’s vitally important to know that if a deceased person did not make a nomination, the trustee of the super fund may use their discretion to decide which dependant or dependants the death benefits are paid to, or make a payment to the deceased's legal personal representative (executor of the deceased estate) for distribution according to the instructions in the deceased's will,” he says.

According to Nguyen, the importance of checking the death benefit nomination in the superannuation statement ­­— or asking the financial adviser or super provider to do so – cannot be stressed enough to clients. He also stresses the importance of working with estate planning firms.

“Most of the time we encourage our clients to pass on assets to their children or grandchildren in the present day rather than on passing. This is done via straight gifts or no-interest loans. We also encourage our clients to set up strategies to fund their grandchildren’s school education. And of course, all the assets transferred are recorded for estate planning purposes.”

Case study

The following is an example of having an estate plan in place before passing.

“In terms of superannuation death benefits, if no nomination is in place, the tax implications can be quite detrimental,” he says. “It’s best practice for the financial dependent to be nominated as a beneficiary (i.e. Spouse or children under 18 years of age) or any prescribed persons as dependent under the Superannuation Industry Supervision Act 1993 (SIS Act).”

In this case, the deceased’s super benefits were passed to her two daughters (age 15 and 17) as follows:

  1. $100,000 paid to testamentary trust for child 1 (aged 15) and has access to capital at age 25.
  2. $100,000 paid to testamentary trust for child 2 (aged 17) and has access to capital at age 25.

She also has a son (aged 25) from another marriage and he received $100,000 from her term deposit.

The balance of $330,000 was paid to another testamentary trust for her husband with income to be distributed to her husband while he is still living, passing on to her three children equally when he passes on.

She also had a life insurance policy of approximately $700,000, which was used to pay off the mortgage and non-concessional super contributions for her husband.

For more information on paying superannuation death benefits please refer to the ATO website.