When undertaking your Estate Planning, it is important to consider, as part of your overall plans, how you wish to deal with residual superannuation. Your superannuation is held within a separate trust structure, known as a superannuation fund, either as a commercial fund or a “self-managed fund” (sometimes referred to as an SMSF).
In a super fund, there is a trustee who is either the commercial fund provider, or a person or company in the case of a self-managed fund. The trustee holds the superannuation entitlements (which may include life insurance and also an accrued balance) on behalf of beneficiaries, who are the members of the fund.
The purpose of a super fund is to provide retirement benefits to its members. Your entitlements to a super fund are not part of your estate, so you cannot allocate any residual superannuation as a gift via your Will alone.
Who receives my residual superannuation?
The first and most important thing is to check the rules of the super fund that you are a member of. Some have rules as to how (and to whom) you can have your entitlements pass to upon death.
After you pass away, the most common outcome is that unless you put in place a binding nomination, your entitlements will be paid either to your dependants, or your Legal Personal Representative (LPR). Often, the rules of a super fund give the trustee discretion to determine who to pay your entitlements to – this may not be appropriate or consistent with your overall estate planning.
A dependant is someone who has a relationship of financial dependency on you – which may come about by living with you, relying on you for financial support or co-mingling finances. If a dependant is receiving your residual superannuation, it can generally be paid to them either as a lump sum or as an ongoing income stream, which is a series of periodic payments from the superfund. Again, the rules of the fund may restrict or expand on these options.
An LPR is usually the executor or administrator of your estate, who will be responsible for administering your estate after you pass away. Superannuation entitlements paid to your estate must be paid as a lump sum and you can nominate your LPR to receive your entitlements via a Binding Death Benefit Nomination.
Binding Death Benefit Nominations
A Binding Death Benefit Nomination, or a BDBN, is a written direction from you to your fund provider that sets out how some or all of your residual superannuation are to be distributed upon your death. BDBNs can either be lapsing or non-lapsing. Lapsing nominations must be renewed when required by the rules of the fund, while non-lapsing nominations will stay in place until you pass away, or the super fund provider receives a new or updated BDBN.
If you make a BDBN for your residual superannuation to be paid directly to your estate (to your LPR), you must ensure both your BDBN and your Will are up to date. Your residual superannuation can then be distributed according to your Will.
In some cases, more tax will be paid on your super entitlements if it is paid to your estate as opposed to a dependant directly. You should obtain accounting advice as to your specific circumstances before executing a BDBN.
What happens if you don’t make a Binding Nomination?
If you don’t make a Binding Nomination, or it has expired at the time of your death, your fund provider must administer the entitlements according to the rules of the fund. Often this gives the provider discretion to either:
- They can determine whether you have dependants, and to which of your dependants should receive the money directly; and/or
- They can pay all or some of the entitlements to your estate.
Tax on residual superannuation
Taxation on your residual superannuation will vary according to your individual circumstances, your wishes, and whether you have dependents. When considering how you would like to allocate residual superannuation, it is recommended you seek independent accounting and financial advice for tax purposes.
In some circumstances, significantly more tax will be paid on your super entitlements if it is paid to your estate as opposed to being paid to dependents directly, particularly a spouse or children under 18 years. You should obtain accounting advice as to your specific circumstances before executing a BDBN.
If you would like to discuss the most effective way of managing any residual superannuation, contact our Adelaide office on (08) 8223 3199, our Millicent office on (08) 8733 2500 or our Whyalla office on (08) 8645 7666 to book an appointment with one of our experienced Estate Planning solicitors today.
This blog was written by Law Graduate Nicholas Wang, with assistance from clerk and fourth-year law student Harry Edmonds.