Superannuation is the largest assets that most people have apart from their home. Your superannuation however is not automatically included as part of your estate when you die. The exception is if you have given instructions for your super to be paid to your estate.
Your will deals with all of the assets that you own, including your house, car, bank accounts, shares and other valuables. Your superannuation however is held in a trust by a trustee on your behalf. You do not actually own your superannuation in your own right.
To make sure that your superannuation goes to those that you intend, you have to make a nomination with your superfund providing those instructions. Without that nomination, the superfund has the authority to decide who receives your superannuation should you pass away, regardless of an instructions in your will.
Who can you nominate as your super beneficiary?
If you pass away your superfund can only pay your death benefit to your eligible superannuation beneficiaries. Your eligible beneficiaries are your spouse or partner, your children, someone in an interdependent relationship with out, someone who is dependent on you, or your legal personal representative.
If you nominate your legal personal representative, this means that you are directing the super fund to pay your superannuation death benefit to your estate so that it can be distributed in accordance with the instructions on your will.
Your will should always be up to date so that your instructions regarding how your super death benefit is distributed in accordance with you wishes.
Nomination of a beneficiary
There are two ways to nominate a beneficiary with your super fund. You can nominate either a binding nomination or a non-binding nomination.
A binding nomination lasts for three years and must be followed by your super fund as long as it nominates one of the parties named above.
A non binding nomination states who you would like your super death benefit to be paid to. The super fund will take this nomination into account, but will decide who your super is paid to. The super fund will examine your family circumstances and consider all potential beneficiaries, and then decide who is the most appropriate to receive your death benefit.
It is important that you make a binding death benefit nomination because the alternative is that the super fund will decide who is to receive your funds, and this may not be as you would like.
When there is no nomination
If you do not have any nomination for your superannuation then the trustee of the super fund can either pay the death benefit to your estate, or decide which of your beneficiaries are most appropriate to pay the funds to depending on their circumstances.
How superannuation death benefits are paid
Superannuation death benefits can either be paid as lump sums or as an income stream.
Payment of death benefits as a lump sum
Lump sum death benefits can be paid to tax dependents (including through your legal personal representative) or to non-tax dependents.
Under taxation law dependents are:
Lump sum payments to these groups of people are not taxed.
Payments of death benefits to non-tax dependents will pay tax on the taxable component of the lump sum superannuation death benefit. The superannuation fund will provide a statement which will set out the taxable and nontaxable components of your superannuation death benefit.
The taxable component of the death benefit will be subject to a maximum tax rate of 15% plus the Medicare levy.
Payment of death benefit as an income stream
The death benefit can also be paid as an income stream, similar to a pension, to a beneficiary.
If the super is paid from taxed super, the income stream may be tax free.
If you and the beneficiary are both under 60 years old when you die, the taxable component of the income stream will be counted as assessable income for the beneficiary. They will be entitled to a tax offset of 15% of that amount. Once your beneficiary reaches 60 years old, the income stream becomes tax free.
If the death benefit is paid from an untaxed amount, and you and your beneficiary are both under 60 years of age, the income stream will eb taxed at your beneficiary’s maximum tax rate with no tax offset. If you and your beneficiary are both over 60 years of age, then your beneficiary will be entitled to a ta offset of 10%.
Children over the age of 25 are not able to receive an income stream unless they have a permanent disability. If they do receive an income stream under the age of 25, they will have to cash it in when they reach that age.
Points to check
When deciding how to distribute your death benefit you should consider the following:
When deciding who to leave your super to, you should consider who among your dependents should revive those funds, and what are the tax implications of doing so. You should consult with your accountant, financial advisor and your lawyer before making the decision of who to leave your superannuation death benefit to.
ReesLaw has years of experienced in all matters relating to superannuation and death benefit nominations. If you have any questions concerning the legal consequences of superannuation and death benefit nominations, please make an appointment to discuss.
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