As more Australians are accumulating significant benefits in superannuation over their working life, understanding how to pass those superannuation benefits on death to your chosen beneficiaries becomes even more important.
You might ordinarily have provided a written binding or non-binding nomination to the trustee of your superannuation fund (including self-managed superannuation fund) directing that you want your superannuation death benefits to be paid to one or more persons who are death benefit dependents (“DBD”) defined in the Income Tax Assessment Act 1997 (“ITAA”) as a:-
- Spouse or former spouse of the deceased;
- Child, aged below 18, of the deceased;
- Person with whom the deceased had an “interdependency relationship” as defined in the ITAA; and
- Person financially dependent on the deceased just before they died.
If the nomination is applied by the trustee on your death, the superannuation death benefits will not go into your estate to be distributed according to your Will. They will go direct to the DBDs.
Alternatively, it is possible to provide a written nomination to the trustee of your superannuation fund directing that your superannuation death benefits get paid to the legal personal representative (“LPR”) of your estate (otherwise commonly known as the executor).
This article assumes superannuation death benefits are paid to the estate, in which case the provisions of your Will become critical. Having the benefits paid directly to your estate can be an effective tool to still maximise the tax advantages of your superannuation death benefits for your beneficiaries, who in the standard situation will be your spouse and children by way of example, but also control the use of and protect that asset to ensure it continues to be available as a resource to your beneficiaries in the future.
A particularly suitable vehicle for achieving these aims is to establish a Superannuation Proceeds Trust (“SPT”) created by the Will.
The SPT is a trust able to receive tax-free the lump sum superannuation death benefits of a deceased fund member.
It is critical you are aware in your estate planning that significant tax consequences (possibly adverse ones unintended and avoidable) flow if you leave your superannuation death benefits to your estate to be distributed according to your Will to DBDs and/or non-death benefit dependent (“NDBD”).
Superannuation death benefits paid to a DBD attract the tax-free status when paid from the fund, as well as favourable concessional tax rates on the income subsequently generated in the case of children under 18.
However, if they are paid to your estate and can be received by a NDBD then the tax-free status of those superannuation death benefits is lost as they are taxable in the hands of your LPR.
In some circumstances, even if the superannuation proceeds are paid to the estate for the benefit of a mixture of DBDs and NDBDs, the tax-free status can be lost.
To avoid the incurring of unintended and unnecessary tax on the superannuation death benefits, it is important that your Will be drafted expressly to require the superannuation death benefits to be paid to DBDs.
A cautious approach would have the SPT set up for death benefit dependents to receive not only the capital of the superannuation proceeds, but also the income.
The added advantage of the SPT is control. With a SPT your LPR or other appointed trustee can control the superannuation death benefits for children in particular, until an age you nominate that they can receive those benefits and protect those benefits against unexpected events such as bankruptcy.
If you would like to discuss your current estate plan with us, please contact us and ask for one of the directors who will be ready to assist.
