It is often said that superannuation is an asset generally dealt with separately from your Will and the rest of your Estate. It doesn’t have to be and, depending on the situation, a carefully considered distribution of superannuation is often integral to good estate planning (and reducing the tax impost on your beneficiaries).
In many cases you will not need to refer to your superannuation in your Will, as the distribution of any superannuation upon your death will be dealt with according to the rules of your Fund, usually at the discretion of the Trustee of the Fund. Of course, you should carefully consider who will receive your superannuation upon your death and how such payment should complement the distribution of the rest of your Estate pursuant to your Will.
Generally, you can plan for the distribution of your superannuation after your death by creating a Binding (or Non-Binding) Death Nomination. If you have a Self-Managed Superannuation Fund (SMSF) you may also have the option of creating specific rules governing the SMSF to direct the Trustee upon the death of a member.
Regardless of your situation, the legislation governing the operation of super funds (known as the SIS legislation) sets out key rules that cannot be ignored. Most importantly, a Trustee can only be bound to pay superannuation death benefits to a person who is either a dependant of the deceased, or their Legal Personal Representative.
A deceased’s Legal Personal Representative (LPR) is the Executor or Administrator of their Estate. Payment can be made to the LPR if there is a Binding Death Nomination to that effect. This may be appropriate if your estate planning needs dictate that your Will should determine the distribution of your whole estate, including superannuation. Payment to the LPR can also act as something of a “default” in the event that a Binding Death Nomination fails, or if there are no dependants. It is vital to take advice on this issue as a payment to the LPR may mean that the whole payment is taxed if one or more of the beneficiaries is not a dependant.
A dependant is defined in the SIS legislation as: “the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship”. These are commonly referred to as “SIS dependants”. However, this definition does not accord with the definition of a dependant for tax purposes, which narrows the field to spouses, minor children and financial dependants: “tax dependants”. The glaring difference between the two definitions is the status of adult children.
The discrepancy between SIS dependants and tax dependants means that you can make a Binding Death Nomination to your adult children, but in doing so you will ensure that each of them will pay tax (at 16.5%) on any benefits received. To the contrary, if you make a Binding Death Nomination to your spouse, the benefits will be paid tax-free.
Our clients sometimes plan to leave their superannuation to their adult children, particularly where the client is married to a new partner and each has children from a previous relationship. It may seem logical to leave your residence to your spouse and your superannuation – often the biggest “cash” asset – to your adult children, to ensure that everyone is looked after. But it is important to remember that such a plan will also benefit the tax office – is this the best use of your money? If there is no alternative it might be appropriate to consider the off-setting tax benefits of gifting the superannuation to one or more testamentary trusts for the benefit of adult children.
Every situation is different and there is no single best approach when dealing with your superannuation. At Beger & Co we can talk to you about your estate planning needs and tailor a solution that works for you.