In Australia, a comfortable retirement generally relies on the hard-earned savings in your super fund. But many people question, “What happens to super when you die?” The simple answer is that the deceased’s nominated beneficiary generally receives super death insurance benefits. Typically, the insurance policyholder selects this person while still alive.
- You must understand tax law and legal requirements when allocating super-death benefits.
- Understanding the definitions of dependents and considering the possible tax implications for non-dependant beneficiaries is necessary to make valid death benefit nominations.
- Proactively assessing beneficiary arrangements, like executing a binding nomination and incorporating superannuation in deceased estate documents, helps ensure you have funds allocated following your wishes.
About the Distribution of Superannuation Death Benefits
Understanding how the distribution of superannuation death benefits works can be complex.
First, know that the super fund must promptly disburse the member’s superannuation death benefit upon a member’s death. As specified by superannuation law and the fund’s governing rules. The superannuation fund’s trustee distributes the deceased member’s superannuation. This money may go to their spouse, de facto partner, or other eligible beneficiaries as specified by superannuation law. Furthermore, when non-dependants receive superannuation entitlements, the deceased’s legal personal representative (LPR) can take payment on their behalf.
- A lump sum payment
- Super income stream
- Regular income payments
An experienced financial advisor can help with taxation laws and other legal requirements.
Identifying Eligible Beneficiaries
Australian superannuation law defines a dependent as someone who was:
- Financially dependent on the deceased person
- Had an interdependent relationship with the deceased member at the time of their passing.
This requirement can include:
- a spouse or de facto
- a former spouse
- a child under the age of 18; a child who has a permanent disability
- adopted children
- any other person who was in a close relationship with the departed and received financial support from them
- An adult child who cannot sustain a basic standard of living without financial support from their parents, including the cost of domestic support.
Your Legal Personal Representative
Making a valid beneficiary nomination is important for distributing a superannuation death benefit as per your wishes. This nomination must meet the definition of a dependant under superannuation law, the fund’s trust deed, or the legal personal representative of your estate.
Types of Death Benefit Payment
A death benefit payment is paid either as a lump sum payment or as an income stream to a death benefit dependant of the deceased. However, children receiving an income stream must meet these requirements:
- Aged younger than 18 or 25 years of age
- Financially dependent on the deceased
- Or living with a permanent disability.
In this case, the super fund must convert the income stream to a lump sum, which should happen before they turn 25 years old.
While a dependent can have several payment options, a non-dependant of the deceased must receive funds as a lump sum.
About Beneficiary Nominations and Their Impact
In Australia, beneficiary nominations generally determine the distribution of a superannuation death benefit. There are two main types of beneficiary nominations: binding and non-binding.
A valid binding beneficiary nomination is a legally enforceable nomination that obligates the trustee to pay the death benefit to the nominated beneficiary or beneficiaries. This ensures that your super funds go to the intended recipients.
Conversely, a non-binding beneficiary nomination guides the super fund trustee when determining who should receive the super payment without any legal obligation to comply with the instruction.
If there is no valid, binding nomination, the trustee will exercise their discretion to determine who will receive the death benefit based on the super fund rules.
Why a Binding Death Benefit Nomination Matters
A binding death benefit nomination is necessary for effective estate planning as it guarantees your preferred recipients receive your insurance benefit. To create a binding death benefit nomination, you must:
- Create a signed and dated written document with two witnesses over the age of 18.
- Clearly state the proportion of benefit payable to each nominated party
At the time of your death, the designated beneficiary must be your dependent or your estate’s legal personal representative.
Binding nominations provide peace of mind, knowing that your super fund benefit will be allocated as desired. Doing this helps eliminate disputes among family members and other recipients.
About Non-Binding and Reversionary Nominations
A non-binding nomination is not legally binding. This means the trustee can make a death benefit payment to the nominated recipient at their discretion. Although this kind of nomination offers flexibility, it can trigger disagreements between beneficiaries and loved ones.
On the other hand, a reversionary nomination gives clear instructions to the fund’s trustee. This type of nomination allocates your existing super pension to be passed to your beneficiary. Providing ongoing financial support after your demise.
However, if the nominated reversionary beneficiary is not considered an eligible dependant, the trustee will exercise its discretion by distributing the death benefit to the account holder’s dependants or legal personal representatives.
Taxation Law and Super Death Benefits
You will likely want to know about the Australian tax imposed on a super death benefit when you are eligible for a lump sum payment or income stream.
Generally, the tax treatment of a super death benefit depends on whether the Income Tax Assessment Act of 1997 (tax law) classifies the recipient as a dependant or non-dependant.
Remember that the definition of dependant under tax law differs from the superannuation law criteria that govern who can be paid a death benefit directly from a super fund.
For tax purposes, dependants are:
- A spouse or de facto partner
- A former spouse or de facto spouse partner
- Your children who are under 18 years old
- A person with whom you had an interdependent relationship
- A financial dependent, also called an ‘ordinary meaning’ dependant
Tax on a Super Death Benefit Payout
Different tax rates apply to a super death benefit payout depending on whether the recipient is defined as a dependant or non-dependant, and if it includes a tax-free component.
Tax-free element: There is generally a tax-free component to a super death benefit payment because these funds were taxed when they were deposited into a super account.
Taxable components: There may be a taxable component of a super death benefit, in which case beneficiaries will pay income tax. In this case, there are taxed and untaxed elements.
How much they owe depends on:
- The method of distributing funds, either as a super income stream or lump sum death benefit
- If the recipient is defined as a dependant under tax law
- For a death benefit income stream, the age of the deceased member and the beneficiary’s age
- The type of income stream, capped benefit or account-based
The majority of Australians pay tax on superannuation fund contributions. However, an untaxed component is created when a death benefit includes an insurance policy payout. That’s because the super fund has already claimed a tax deduction for insurance premiums.
Tax Implications for Lump Sum Death Benefits
Tax considerations for lump sum death benefits depend on whether the recipient is classified as a “death benefit dependent” and its components.
Generally, the super death benefit paid to a beneficiary consists of several components, each with a different tax rate.
- Taxed element: maximum tax rate is 15% plus the Medicare levy
- Untaxed element: maximum tax rate is 30% plus the Medicare levy
Please understand that these rates may change. So, it’s best to consult a financial advisor or the Australian Taxation Office for the most up-to-date information.
A tax-free lump sum death benefit is generally better than an income stream payment for tax purposes. Especially when the beneficiary is over 60 years old, or there in no tax owed on the taxable benefit components.
Income Stream Death Benefits and Taxes
There are generally no specific tax implications or regulations for income stream death benefits. The transfer balance cap limits the maximum amount of super savings transferable into the retirement or pension phase. Particular regulations apply to death benefit income streams, including:
- Remaining below the personal transfer balance cap
- Not transferring into another fund that starts a death benefit income stream or pays a lump sum.
There are three options when you are at risk of exceeding your transfer balance cap:
- Choose a lump sum payment
- A mix of pension and lump sum
- Use a re-contribution strategy
Estate Planning and Super: Your Intent and the Law
Effective estate planning and legal compliance are the best ways to ensure the distribution of super death benefits per your intentions. Three main actions determine estate allocation success.
- Assess your existing superannuation beneficiary arrangements.
- Execute a binding death benefit nomination
- Incorporate superannuation into your estate planning documents
Seeking professional advice from a financial planner or estate planning lawyer can further assist in navigating the complexities of estate planning and the superannuation industry.
Is Super Included in Your Will?
Due to its holding in trust and distribution following the super fund rules and beneficiary designations, a will does not typically cover superannuation. However, by giving a binding death benefit nomination to your superannuation provider, you can guarantee a superannuation benefit is paid according to your desires.
A good plan is to nominate the legal personal representative of your estate as the beneficiary of your super. Ensure this is a valid nomination (they are eligible beneficiaries) to avoid potential disputes.
Insurance Through Superannuation and Death
Insurance within superannuation will have a significant impact on death benefits and the distribution process. That’s because death benefits can have an untaxed element in proceeds from a life insurance policy contained in a superannuation account. Typically, a death benefit payout to non-tax dependents may be subject to taxation on the taxable component.
Understanding the role of insurance through superannuation upon death helps ensure better financial security for those with whom you have a close personal relationship. This insurance cover provides a payout that helps cover living expenses and maintain financial stability.
Preparing for the Unexpected: Steps to Take Now
It’s never too early to prepare for your passing to ensure a super death benefit distribution that meets your intentions. To coordinate your superannuation with your estate planning, you should:
- Review superannuation beneficiary arrangements.
- Execute a binding nomination.
- Make superannuation part of your estate plan.
- Regularly review and update your binding nomination to ensure it remains valid and accurately reflects your current financial situation and intent.
Superannuation Death Benefits FAQs
Does your family get your super when you die?
Your family may receive your super if you die, depending on the rules of the fund and your binding nominations. The trustee of the fund will generally distribute the death benefit to eligible beneficiaries, such as your current partner or children.
Can you leave superannuation in a will?
Your super can be left to your legal personal representative, who is responsible for distributing funds following your will. You can also nominate any person you wish to receive your super account balance by lodging a binding nomination with your super fund. There are different rules and regulations for superannuation compared with other personal assets.
If you do not have any dependants and have not made a valid, binding beneficiary nomination, the super fund pays the money to your estate, where the executors can distribute the funds.
How do I ensure my child inherits my super?
To ensure that your loved ones receive your super upon your death
- Make a binding nomination
- Carefully read the forms and have regular reviews
- Seek professional advice
- Pay special attention to self-managed super funds
What happens to superannuation when a person dies?
When someone dies, their super fund must pay the remaining balance to their nominated beneficiary. This process follows the super fund rules and can be either a one-off payment or a regular income stream.
What is an interdependency relationship in a superannuation claim?
According to the Australian Tax Office, an interdependency relationship exists between two people when, at the time of death, they:
- Had a close personal relationship
- Lived together
- One, or both, provided the other with financial support
- One, or both, provided the other with domestic support and personal care
What happens to your super if you die before retirement?
If someone dies before retirement, a death benefit is usually paid to nominated beneficiaries. Most Australian super funds allow you to make a binding or non binding nomination.