Please note: This information is general in nature and does not constitute legal or financial advice. For guidance specific to your personal circumstances, please consult with qualified legal and financial professionals.
When planning for the future, many Australians focus on creating a will to distribute their assets but may not be aware that superannuation often follows different rules. Superannuation death benefits can comprise a substantial portion of a person’s wealth, yet they don’t automatically form part of a will’s provisions. Understanding how superannuation is handled after death is an important consideration in comprehensive estate planning.
This guide explains what happens to superannuation when a person passes away, how death benefits are typically distributed, and various approaches to superannuation in the context of broader estate planning goals.
What Are Superannuation Death Benefits?
Superannuation death benefits refer to the funds paid out from a person’s superannuation account following their death. These benefits typically include:
- The accumulated balance in the superannuation account
- Any investment earnings
- Insurance payouts (if the deceased had life insurance through their super fund)
Unlike regular assets that form part of an estate, superannuation is held in trust by the super fund trustee and is governed by specific rules regarding its distribution after death.
Who Can Receive Superannuation Death Benefits?
Under superannuation law, death benefits can only be paid to eligible dependants or to the deceased’s legal personal representative (the executor of the estate). Eligible dependants include:
- Spouse or partner – Including legally married, de facto, and same-sex partners
- Children – Of any age, including adopted, step, and ex-nuptial children
- Financial dependants – Anyone who relied on the deceased financially at the time of death
- Interdependent relationships – Where two people have a close personal relationship, live together, and provide financial and domestic support and personal care
It’s important to note that parents, siblings, and other relatives are generally not considered dependants unless they were financially dependent on the deceased at the time of death.
How Are Superannuation Death Benefits Distributed?
The distribution of superannuation death benefits depends on several factors:
1. Binding Death Benefit Nominations
A binding death benefit nomination (BDBN) is a written direction to a superannuation trustee that specifies who should receive super benefits when a member dies. When properly executed, a binding nomination:
- Provides control over who receives the superannuation
- Requires the trustee to pay benefits according to the instructions
- May help avoid potential conflicts or disputes about intentions
BDBNs can be:
- Lapsing – Valid for three years and then must be renewed
- Non-lapsing – Remains valid until changed or revoked
For a BDBN to be valid, it typically must:
- Be in writing and clearly express intentions
- Be signed and dated in the presence of two witnesses who are not beneficiaries
- Nominate only eligible beneficiaries or the legal personal representative
2. Trustee Discretion
If there isn’t a valid binding nomination in place, the trustee of the super fund has the discretion to determine who among the eligible beneficiaries will receive the death benefits. The trustee is typically required to:
- Identify all potential beneficiaries
- Consider their relationship with the deceased
- Assess their level of financial dependency
- Make a determination based on these factors
This discretionary process can sometimes lead to outcomes that don’t align with what the deceased might have preferred.
3. Payment to the Estate
If the legal personal representative (executor) is nominated as the beneficiary of the super, or if the trustee determines this is appropriate, the superannuation death benefits will be paid to the estate. Once part of the estate, these funds are distributed according to:
- The terms of the will, if one exists
- Intestacy laws, if the person died without a valid will
When superannuation is paid to an estate, it becomes subject to potential claims from creditors and may be challenged by eligible persons under family provision legislation.
Tax Implications of Superannuation Death Benefits
The tax treatment of superannuation death benefits varies depending on several factors, including:
- Whether the beneficiary is a tax dependant
- The components of the superannuation benefit (taxable vs tax-free)
- Whether the benefit is paid as a lump sum or an income stream
Tax Dependants vs Non-Tax Dependants
For tax purposes, a dependant includes:
- A spouse or former spouse
- Children under 18 years of age
- Any person financially dependent on the deceased
- Any person in an interdependency relationship with the deceased
The tax treatment differs between these groups:
For tax dependants:
- Lump sum death benefits are tax-free
- Income stream death benefits are also generally tax-free if either the deceased or the recipient is aged 60 or over
For non-tax dependants:
- The tax-free component remains tax-free
- The taxable component is subject to tax (generally 15% plus Medicare levy)
- Income streams cannot be paid to non-tax dependants and must be converted to lump sums
Taxable vs Tax-Free Components
Most superannuation accounts contain:
- Tax-free component – Typically consists of after-tax contributions
- Taxable component – Generally includes employer contributions, salary sacrifice contributions, and investment earnings
Understanding the composition of superannuation can be relevant to estate planning considerations, as the tax-free component is not taxed when paid to any beneficiary, while the taxable component may be taxed when paid to non-tax dependants.
Lump Sum Payments vs Income Streams
When receiving superannuation death benefits, eligible dependants may have options regarding how they receive the funds:
Lump Sum Payments
A lump sum payment provides the entire superannuation benefit in one payment. This option:
- Provides immediate access to the full amount
- May be subject to tax if paid to a non-tax dependant
- Removes the money from the superannuation environment and its associated tax considerations
Income Streams (Death Benefit Pensions)
An income stream converts the superannuation balance into regular payments over time. This option:
- Is only available to certain dependants (spouse, dependent children, or those in an interdependency relationship)
- Keeps the funds within the superannuation environment
- For dependent children, must be converted to a lump sum when they turn 25 (unless they have a disability)
Estate Planning Considerations for Superannuation
When incorporating superannuation into broader estate planning, there are several approaches that may be considered:
1. Binding Death Benefit Nominations (BDBNs)
As discussed earlier, a BDBN provides instructions to a super fund trustee. Related considerations might include:
- Regular review – Even non-lapsing nominations may benefit from periodic review, especially after major life events
- Specific allocations – Some people specify percentages rather than specific amounts
- Contingent arrangements – Some funds allow for secondary nominations if a primary beneficiary predeceases the member
2. Testamentary Trusts
If superannuation is directed to an estate, testamentary trusts established in a will can:
- Provide structures for income distribution
- Offer potential protection for assets
- Allow control over the timing and conditions of inheritance
3. Recontribution Approaches
Some individuals in retirement phase might explore approaches that involve:
- Withdrawing funds from superannuation (tax-free for those over 60)
- Making new contributions as non-concessional contributions
- Potentially changing the tax-free component of the superannuation
Such approaches may have implications for how death benefits are ultimately taxed when received by non-tax dependant beneficiaries.
4. Superannuation Proceeds Trusts
A superannuation proceeds trust is a specific type of trust that:
- Can only be funded with superannuation death benefits
- May provide tax considerations for dependent children
- Must be established within specific timeframes
5. Consideration of Funds Outside Superannuation
In some circumstances, holding funds outside the superannuation system might be examined, particularly if:
- The intended beneficiaries are non-tax dependants
- Estate planning objectives are complex
- There are concerns about potential challenges to trustee decisions
Common Considerations in Superannuation Estate Planning
When planning for superannuation in the context of estate planning, there are several important considerations to be aware of:
1. Understanding How Superannuation Relates to Wills
One of the most common misunderstandings is that superannuation automatically forms part of an estate and is distributed according to a will. As noted earlier, super is governed by different rules and typically requires specific nominations to direct its distribution.
2. Currency of Binding Nominations
Life circumstances change – relationships begin and end, children are born, and financial situations evolve. Binding nominations may need review after significant life events to ensure they continue to reflect current circumstances.
3. Validity of Binding Nominations
A binding nomination may be invalid if:
- It nominates ineligible beneficiaries
- It’s not properly witnessed
- It has expired (for lapsing nominations)
- It doesn’t meet specific fund requirements
An invalid nomination may result in the trustee exercising discretion over the distribution of benefits.
4. Tax Considerations
The tax treatment of super death benefits varies significantly depending on who receives them. The tax implications for different beneficiaries may be relevant to estate planning decisions.
5. Anti-Detriment Payment Awareness
Some funds may offer anti-detriment payments, which effectively refund contributions tax paid during the member’s lifetime. Not all funds provide this benefit.
6. Insurance Within Superannuation
Many superannuation accounts include life insurance coverage. This insurance can significantly increase the death benefit payable and is also subject to the same distribution rules as the rest of the superannuation.
Approaches to Superannuation Estate Planning
Those looking to address superannuation in their estate planning might consider these general approaches:
1. Reviewing Current Arrangements
- Checking current superannuation balances and any insurance coverage
- Identifying existing beneficiary nominations and whether they’re binding or non-binding
- Determining if nominations have expired or might need updating
2. Identifying Potential Beneficiaries
- Listing potential beneficiaries and their relationship
- Determining which are dependants under superannuation law
- Understanding which are tax dependants
3. Examining Distribution Options
- Considering whether direct payment to beneficiaries or payment to an estate may be more appropriate
- For direct payments, understanding differences between lump sums and income streams
- For estate payments, ensuring the will addresses the superannuation proceeds
4. Documentation Considerations
- Completing binding death benefit nominations for each superannuation fund
- Ensuring nominations are properly witnessed and submitted to fund trustees
- Documenting intentions and reasoning
5. Periodic Reviews
- Reviewing superannuation estate planning after major life events
- Checking lapsing nominations before their expiry dates
- Reassessing plans if there are changes to superannuation laws or tax regulations
- Coordinating with broader estate planning
Illustrative Example: Superannuation Estate Planning Scenario
Note: The following example is fictional and for illustrative purposes only. It does not constitute advice or a recommendation.
Scenario: Sarah, 58, has $850,000 in her superannuation fund, which includes a life insurance policy worth $250,000. She has:
- A spouse, Michael (56)
- Two adult children from her first marriage: Emma (30) and Jack (28)
- One stepchild, Thomas (26), who is Michael’s son
Sarah’s Estate Planning Considerations:
- Financial security for Michael
- Providing for her biological children
- Balancing family needs
- Tax implications
Sarah’s Approach:
- She makes a binding death benefit nomination for 70% of her superannuation to go to Michael as an income stream
- The remaining 30% is nominated to go to her estate
- In her will, she establishes a testamentary trust for the superannuation proceeds that come to her estate, with Emma and Jack as beneficiaries
- She includes specific provisions in her will to benefit Thomas from other estate assets
This example illustrates how superannuation nominations and will provisions can work together to address various estate planning considerations.
The Interaction Between Superannuation and Wills
Understanding how superannuation interacts with wills is important for comprehensive estate planning:
When Superannuation Is Directed to the Estate
If superannuation is paid to the estate (either through a binding nomination or trustee discretion), it becomes subject to:
- The terms of the will
- Potential challenges under family provision legislation
- Claims from creditors
- Estate administration costs
A will can provide specific instructions for how superannuation proceeds should be distributed, including:
- Direct gifts to beneficiaries
- Establishment of testamentary trusts
- Charitable bequests
When Superannuation Bypasses the Estate
When superannuation is paid directly to dependants, it:
- Is not governed by the terms of the will
- Is not subject to challenge under family provision legislation (though the trustee’s decision can be disputed)
- Is protected from creditors’ claims against the estate
- Avoids estate administration costs and delays
Coordinating Superannuation and Wills
For effective estate planning, superannuation nominations and wills can work together:
- A will might acknowledge that certain assets may pass outside the estate
- Total distribution of wealth across both estate and non-estate assets may be considered
- Both documents might be updated when circumstances change
- Tax implications of the chosen structure may be relevant that certain assets may pass outside the estate
- Consider the total distribution of wealth across both estate and non-estate assets
- Update both documents when circumstances change
- Consider the tax implications of your chosen structure
Special Considerations for Different Life Stages
Your superannuation estate planning needs will evolve throughout your life:
Young Adults
For those early in their career with smaller superannuation balances:
- Ensure you have valid death benefit nominations in place
- Consider additional life insurance through superannuation to provide for dependants
- Review nominations after relationship changes
Parents with Dependent Children
For those with young families:
- Consider how superannuation death benefits can provide ongoing support for children
- Explore guardianship arrangements if both parents pass away
- Ensure adequate insurance coverage within superannuation
Pre-Retirees
As retirement approaches:
- Review the tax components of your superannuation
- Consider recontribution strategies to improve tax efficiency
- Ensure nominations reflect current family circumstances
Retirees
In retirement phase:
- Regularly review estate planning as superannuation balances change
- Consider the implications of minimum drawdown requirements
- Assess whether funds should remain in the superannuation environment
Seeking Professional Advice
Given the complexity of superannuation and estate planning, professional advice is invaluable. Consider consulting:
Financial Advisers
A qualified financial adviser can help you:
- Understand your current superannuation position
- Develop strategies to optimize your superannuation for estate planning purposes
- Navigate the tax implications of different approaches
Legal Professionals
An experienced estate planning lawyer can assist with:
- Preparing binding death benefit nominations
- Drafting a will that complements your superannuation arrangements
- Establishing appropriate trust structures
Tax Professionals
A tax accountant or tax lawyer can provide guidance on:
- Tax implications for different beneficiaries
- Strategies to minimize tax on death benefits
- Ongoing tax planning for beneficiaries
Conclusion
Superannuation death benefits form a significant part of many Australians’ wealth, yet they operate under different rules than traditional estate assets. Effective estate planning requires understanding these differences and taking proactive steps to ensure your superannuation is distributed according to your wishes.
By making valid binding death benefit nominations, understanding the tax implications, considering the needs of your beneficiaries, and coordinating your superannuation planning with your broader estate plan, you can provide financial security for your loved ones and minimize potential conflicts after your passing.
Remember that superannuation laws and regulations change over time, so regular reviews of your arrangements are essential. While this guide provides general information about superannuation death benefits and estate planning, your personal circumstances will determine the most appropriate strategy for you.
Disclaimer: This information is general in nature and does not take into account your personal circumstances, needs or objectives. Before acting on this information, you should consider whether it is appropriate for your circumstances. Please consult with appropriate professionals for legal, financial, and tax advice tailored to your specific situation.
Frequently Asked Questions About Superannuation Death Benefits
Can anyone be nominated as a beneficiary for superannuation?
No, only dependants (spouse, children, financial dependants, or those in an interdependency relationship) or the legal personal representative (estate) can be nominated. Other relatives or friends can only receive superannuation if it’s paid to the estate and then provided for them in the will.
What happens if there is no binding death benefit nomination?
If there is no binding nomination, the trustee of the superannuation fund will have discretion over how death benefits are distributed. While they must follow certain rules and consider eligible dependants, the outcome may differ from what the member might have intended.
Can superannuation death benefit distributions be disputed?
Yes, superannuation death benefit distributions can be disputed in several ways:
- A beneficiary can object to a trustee’s decision through the fund’s internal dispute resolution process
- Complaints can be lodged with the Australian Financial Complaints Authority (AFCA)
- If paid to the estate, the super proceeds may be subject to family provision claims along with other estate assets
How are former spouses treated regarding superannuation death benefits?
A former spouse is not automatically entitled to superannuation death benefits. However, they may still qualify as a financial dependant if they were financially dependent on the deceased at the time of death. Additionally, if they are the parent of dependent children, they might receive benefits in trust for those children.
How might superannuation be addressed in blended families?
Blended families can present complex estate planning considerations. Without careful planning, conflicts may arise between current spouses and children from previous relationships. Approaches to consider might include:
- Split nominations between current spouse and children
- Directing specific portions to the estate and using the will to provide for family members
- Using testamentary trusts to provide ongoing support for multiple beneficiaries
Does superannuation form part of the taxable estate?
Superannuation is generally not an estate asset for probate purposes unless it’s paid to the estate. However, if the estate is nominated as the beneficiary of the superannuation, those funds will form part of the estate and be distributed according to the will. They may also become subject to estate taxes, creditor claims, and family provision applications.
Is it possible to leave superannuation to a charity?
A charity cannot be nominated directly as a beneficiary of superannuation death benefits. However, the legal personal representative (estate) can be nominated and then instructions provided in the will to donate those funds to charity.