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Estate Planning with Superannuation: A Comprehensive Guide

By Jonathon Naef

Introduction to superannuation in estate planning

Superannuation is often one of the largest assets we have, and our superannuation death benefits can be one of the largest assets that pass to our loved ones. Superannuation doesn’t automatically form part of your estate plan, but it can, if you
take the appropriate steps.

Death is a compulsory cashing event when it comes to your superannuation, which means that it must be paid out, but there are strict and complex rules that apply to this, including who can benefit and how.

Failure to properly plan for how your superannuation death benefits will pass can have unintended consequences. See an article the author, Jonathon Naef, contributed to on this topic here: A top lawyer reveals how to stop your lover from
taking your superannuation death payout | Daily Mail Online
.

This article will introduce you to some of the key aspects of planning for the distribution of your superannuation death benefits, and to help you understand where you may need further advice.

Eligible beneficiaries for superannuation

Superannuation Law (Superannuation Industry (Supervision) Act 1993 (SISA)) dictates that only a dependant or your estate (your legal personal representative) can receive your superannuation death benefits. Superannuation Law dependants include:

  • A spouse, which includes a person (of the same or different sex) with whom you’re in a relationship registered under State or Territory Law (so a marriage, civil union, civil partnership, etc.) or who lives with you on a genuine domestic basis.
  • A child, which includes a biological child, adopted child, step-child, child of your spouse or who is a child of yours within the meaning of the Family Law Act 1975.
  • Any person with whom you have an interdependency relationship, who is someone you are in a close personal relationship with, you live together, and one or each of you provides the other with financial and domestic support and personal care.

Under the above definitions, unless a parent, sibling or friend satisfies the definition of an interdependency relationship, they cannot directly benefit from your superannuation death benefits. In order for such people to benefit from your superannuation death benefits, you would first need to direct your superannuation death benefits to your estate (legal personal representative), and then distribute them under your will.

While the above persons may be eligible to receive superannuation death benefits, not all recipients are eligible to receive those benefits tax-free. Only people who meet the definition of a death-benefit dependant under Tax Law (Income Tax Assessment Act 1997) can receive superannuation tax-free. Tax Law dependants include:

  • A spouse or former spouse, which has the same meaning as above.
  • A child, which has the same meaning as above, but only if they are under the age of 18
  • Any person with whom you have an interdependency relationship, which has the same meaning as above.
  • Any person who was dependent on you just before you died.

While the above lists seem very similar, there are subtle differences that can impact the distribution of your superannuation death benefits, and how much actually ends up in the hands of who you intend to benefit from such distributions.

Superannuation death benefit nominations

A superannuation death benefit nomination specifies where your superannuation goes after your death. The Superannuation Industry (Supervision) Regulations 1993 outline what a nomination must include, however, most superannuation funds will have a prescribed form available on their website.

Superannuation death benefit nominations can be binding or non-binding. A binding nomination is just that, binding. The superannuation fund must follow the nomination unless it is deemed to be invalid. If you make a non-binding nomination, on the other hand, the superannuation fund is not required to follow your nomination, it’s more a declaration of your wishes (they can choose not to follow them).

Superannuation death benefit nominations can also be lapsing and non-lapsing. Most binding nominations are lapsing, which means they expire after three years. Non-lapsing nominations continue, however, until you either pass away or make
another superannuation death benefit nomination to vary your first one.

In relation to self-managed superannuation funds, the 2022 High Court case of Hill v Zuda says that nominations for self-managed superannuation funds don’t necessarily need to comply with the Regulations. For self-managed superannuation
funds, you must consider the requirements under the relevant trust deed.

Defined benefit superannuation and estate planning

Many people, especially public servants who started their career in or before the early 2000’s, have defined benefit superannuation interests. Common defined benefit interests include CSS, PSS, DFRDB and MSBS. Some members of these
funds have the option to take their superannuation when they retire as a pension, which they receive for life.

Because of the complex nature of defined benefit superannuation interests, the superannuation fund will not allow members to nominate where their superannuation death benefits go after they die. If they have a spouse and are receiving a pension,
then that spouse may receive a percentage of the pension for the rest of their life. Otherwise, depending on how old the member is when they die, there may be some lump sum benefits to be paid out, however, again, the superannuation fund will
dictate where these interests go.

Superannuation funds that offer defined benefit interests will often have guides on their website about the distribution of defined benefit superannuation interests, or they will be specified in legislation that establishes the fund and/or the fund’s trust deed.

Self-managed superannuation funds and estate planning

Unlike ordinary accumulation superannuation funds and defined-benefit funds, superannuation death benefits from a self-managed superfund may include assets, as well as or instead of cash. This can cause some difficulties when a member of a
self-managed superannuation fund dies, especially if that fund has more than one member.

Some key considerations when planning for the distribution of superannuation death benefits from self-managed superannuation funds include:

  • If the fund owns assets, can those assets be transferred out “in specie” (meaning that the asset passes from the superannuation fund to the nominated dependant), or does the asset have to be sold while in the fund and only cash can be distributed.
  • How will the compulsory cashing of one member of a self-managed superannuation fund interest impact the other surviving member’s interest in the fund. Again, will assets held within the fund need to be sold in order to distribute the death benefits.
  • Does the fund allow any pensions to be paid? If so, is the payment of a pension possible and appropriate in the circumstances?

In addition to the above, as members of self-managed superannuation funds must either be trustees or directors of the trustee company, it is important to consider who will step into that role after you have died. The wrong person stepping into that role can have significant consequences on the distribution of your superannuation death benefits.

It is beneficial when estate planning for self-managed superannuation funds to involve other professionals, like lawyers, financial planners and accountants, to ensure the most appropriate steps are taken.

Should superannuation form part of your estate (or stay separate)?

Some factors that may be considered when determining whether to make your superannuation form part of your estate or not, include:

  • Who is the intended recipient? Only dependants (see above) can receive superannuation directly from the fund. A non-dependant (see above) can receive your superannuation death benefits only if the first passes through your estate.
  • How are the benefits to be paid out? It may be that in order for the intended recipient of the super death benefits to receive a pension, it must come directly from the fund rather than through the estate.
  • Are there any risks of someone challenging your will? Keeping superannuation out of your estate may protect it from any potential claims made against your estate for further provision (for example, if you leave someone out of your will). But beware of notional estate laws! This may be particularly important in blended family situations.
  • Are you considering trusts as part of your overall estate plan? It may be beneficial to have your superannuation paid to your estate, so that it may form part of a trust established in your will that provides some tax flexibility asset protection (for example, family law risks, and vulnerable beneficiaries).
  • Are there any tax consequences associated with the distribution of superannuation? Does this change depending on the above factors?

The author, Jonathon Naef, has contributed to an article through the College of Law on this topic, which can be found here: Superannuation and estate planning: To include or not to include? (collaw.edu.au).

Why Balance Family Law?

Superannuation is often one of the largest assets we have, and our superannuation death benefits can be one of the largest assets that pass to our loved ones. Not considering your superannuation when updating your estate plan can significantly
impact whether your overall estate planning goals are met.

For personalised advice and expert assistance in crafting a robust plan for your superannuation death benefits, contact us at Balance Family Law for the expertise you need to leave a lasting legacy for your loved ones.

Disclaimer

The information provided on this blog is for general informational purposes only. It is not intended as legal advice and should not be construed as such. The content of this blog may not reflect the most current legal developments and should not be considered an indication of future results. Balance Family Law make no warranties regarding the accuracies of this blog and shall not be liable for any damages arising out of the use of the information contained. Legal issues are complex and unique to each case. Therefore, readers are encouraged to seek personalised legal advice tailored to their particular circumstances.

Article by Jonathon Naef, Senior Lawyer, Wills & Estates Team Leader and Co-Founder of Balance Family Law

Jonathon has a Master of Laws (Applied Law) Majoring in Estate Planning from the College of Law and has experience in simple and complex matters surrounding family law and wills and estate matters, including:

  • Wills
  • Testamentary trusts
  • Trust succession
  • Company succession
  • Self-managed superannuation funds succession
  • Superannuation death benefits
  • Powers of Attorney, Guardianship and Conservatorship
  • Probate and estate administration
  • Collaborative estate law
  • Binding financial agreements
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Outside of Balance, I am an adjunct lecturer and assessor with the College of Law in the ACT. In this role, I lecture and mentor future lawyers in the ACT and surrounding regions, as they complete their Practical Legal Training (which is the course you are required to complete to be able to practice as a lawyer).

When I am not lawyering I love to travel and have already made it to 18 countries across Europe and Asia. My personal goal is to travel to every continent, including Antarctica. My favourite destination so far is Lauterbrunnen in Switzerland, where I skydived over the Swiss Alps!

My innovative approach to law has seen me, and Balance Family Law recognised with over 23 national and international awards and accolades since 2020 including the prestigious Lawyer’s Weekly Family Law Partner of the Year 2021, Australian Law Awards Sole Practitioner of the Year 2021, Australian Law Awards Boutique Law Firm of the Year 2020 and the Gold Ausmumpreneur Award for a Service Business in 2020 and 2021. I have also received consecutive Chief Minister’s Awards for Excellence for my work with families and children on the frontline during my time working in child protection. In 2022 and 2023, I was invited to be a Judge at the Lawyers Weekly 30 Under 30 Awards, and Partner of the Year Awards, and the National Ausmumpreneur Awards.

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