Since the introduction of compulsory superannuation in 1992, superannuation has grown as a long-term savings vehicle. The centrepiece of policy was the introduction of compulsory employment-based superannuation where employers were required to provide minimum levels of superannuation support for their employees. Today, superannuation has become the foundation of retirement incomes in Australia and is seen as a savings and investment product that provides tax-advantaged retirement benefits for members and their dependents in the form of lump sums, pensions or both.
Despite its omnipresence, some Australians still have vague ideas about what exactly superannuation is, how it works, how it relates to Wills and the legal issues that may be involved. The purpose of this blog is to highlight some of the common misconceptions about superannuation death benefits. These misconceptions can prove disastrous and may result in unexpected outcomes for beneficiaries. Below are 7 common misconceptions.
1. All nominations of beneficiaries are binding and trustees must follow them
This is simply untrue. There are 3 types of nominations of beneficiaries. These are:
- Non-binding Nomination (commonly known as a “preferred nomination”);
- Binding Nomination; and
- Non-Lapsing Binding Nomination.
Preferred nominations effectively advise the trustee of the superannuation fund of the individual/s to whom the member would prefer their benefit to be paid to in the event of their death. Though the choice is persuasive, the ultimate decision as to who will receive the death benefit and how it will be divided in the event of multiple beneficiaries will be made by the trustee. In considering who benefits and in what amount, the trustee will consider the wishes of the deceased, the financial circumstances and needs of the potential beneficiaries and the nature of the relationship between the deceased and the proposed beneficiaries.
Complications arise when:
- The nominated beneficiary is not a “dependant” as defined by legislation;
- The nominated beneficiary is an organisation (for example a charity); or
- There are dependants who have survived the member but who are bypassed in favour of others.
A binding nomination is binding on a trustee who must distribute a death benefit in accordance with the nomination. Though not all superannuation funds offer binding death benefit nominations, for those that do, there are procedural requirements to follow. These are:
- The nomination has to be in written form;
- It must be signed and dated by the member in the presence of two witnesses (above 18 years of age and neither of whom is also a nominated beneficiary);
- It must contain a signed declaration by the witnesses stating that the member signed the documentation in their presence;
- As binding nominations are valid for 3 years, they will lapse if they are not renewed; and
- At the time the nomination was made, the deceased member was not under a legal disability.
This brings us to the third type of nomination which is a non-lapsing binding nomination. Under this, a person can direct a trustee as to whom a death benefit is to be paid, but only if the trust deed of the fund provides that the trustee consents to the directions in death beneficiary nominations.
2. There is flexibility in defining who is a “dependent”
Apart from being left to a legal representative, superannuation death benefits can only be left to “superannuation dependants”, meaning:
- A member’s spouse (including domestic partner, same-sex partner and former spouse);
- Any child (including adopted child and stepchild);
- Anyone who was financially dependent on the member; or
- Anyone with whom the member has an “interdependency relationship” (the person has a close personal relationship with the member, lives together with them, at least one of them provides the other with financial support, and at least one of them provides the other with domestic support and personal care).
This definition is fixed by legislation. Should you be determined that someone outside this definition or an organisation be included, seek advice from our estate planning lawyers on how best to include them.
3. Anyone is eligible to receive superannuation death benefits
Superannuation benefits cannot be paid directly to minors or to persons suffering from some types of mental illness because the law deems them to be vulnerable and who require protection. In such cases, benefits will be paid out to the beneficiary’s next of kin to be held on trust for the beneficiary’s maintenance, education and advancement in life. Where the next of kin is unable to care for the beneficiary’s physical, mental and emotional wellbeing, or the beneficiary’s financial wellbeing, the benefits will be paid to one of the following to hold on trust:
- An adult dependant of the beneficiary, eg. an adult child of a beneficiary suffering from a mental incapacity;
- A person having the care or custody of the beneficiary; or
- The NSW Trustee and Guardian or equivalent interstate body.
4. Superannuation forms part of a member’s estate
Superannuation is to provide income in retirement to members and their dependants – it is not devised to automatically form part of a member’s estate. Superannuation death benefits will only form part of an estate and be disposed of in accordance to a Will if:
- the member has executed a valid binding death benefit nomination that directs the trustee of the superannuation fund to pay superannuation death benefits to the member’s legal representative (that is, executor or administrator) to be dealt with according to their Will; or
- in the absence of any binding death benefit nomination, the fund’s trustee in its discretion decides to pay the superannuation death benefits to the legal representative.
5. All lump-sum superannuation death benefits are tax free
Lump-sum superannuation death benefits paid directly to a “tax dependant” are received tax free. A “tax dependant” is the same as a “superannuation dependant”, except that a child must be under 18, be someone who is financially dependent on, or be someone in an interdependency relationship with the deceased.
Situations where a lump sum superannuation death benefit may be taxable are:
- Where the beneficiary is a child of the member who is above 18 and is not otherwise a “tax dependant”; or
- The beneficiary is the member’s legal representative and the member’s Will makes some part of the superannuation death benefit payable to a non-dependant (for tax purposes).
6. Superannuation covers funeral expenses
Often families feel that they are entitled to receive some of the deceased member’s death benefits to help pay for the costs incurred during a funeral. The only method by which funeral expenses can be recouped is if all or part of the death benefit is paid to the estate which then reimburses the costs of the funeral. This however will be ideal where there are no potential dependents because payment of the death benefit to the estate could also result in payment to other creditors who are waiting in line before the balance can be distributed to the beneficiaries.
Persons paying for funeral expenses should therefore clearly understand that there is no such thing as an automatic right of recovery of funeral costs.
7. There are no costs for the distribution of death benefits
Where there are legal or other costs incurred in relation to the distribution of death benefits to a beneficiary, a trustee may recover those costs from the death benefit payable to that beneficiary.
The above list of common misconceptions is not exhaustive. Call us at 1 800 770 780 or contact us via email at [email protected] to schedule a free consultation with our team of estate planning lawyers to understand superannuation death benefits better. We look forward to assisting you.