For many Australians, superannuation is one of their most valuable assets, often surpassed only by the family home. As Australians are working and living longer and the rate of mandatory employer contributions is increasing, in years to come, it has been suggested that superannuation will become the most valuable asset upon death.
It is therefore critical to ensure careful consideration is given to how wealth accrued in superannuation funds will pass following death.
So what happens to superannuation proceeds after death?
As a general rule, superannuation may not automatically form part of the pool of assets that may be distributed under a Will (“the estate”), such as personal effects, real estate, and bank accounts in a person’s individual name.
Generally speaking, this is because rules applying to each superannuation account – including those set out in the superannuation trust deed and legislation – determine how a member’s benefits are to be distributed following their death.
In advance of death, many (but not all) superannuation funds allow members to prepare a document called a “Binding Death Benefit Nomination” (“BDBN”). It is important to review the rules pertaining to each person’s superannuation account to determine if a BDBN is permitted.
In addition, many of our clients advise us they have made a death benefit nomination on their superannuation account without knowing the difference between binding and non-binding nominations. Many clients prepare non-binding nominations by indicating how their death benefits are to be distributed either through their online account portal, over the phone, or some other means that do not comply with the requirements of a valid Binding Death Benefit Nomination, which are set out below.
Binding Death Benefit Nominations
A BDBN is a document that can be prepared by a member of a superannuation fund which nominates person(s) who are to receive the proceeds of their superannuation account after death. This nomination may also cover any insurance component on the account. Accordingly, this is an opportunity for the member to give directions to their fund as to how their superannuation death benefits are distributed following death.
If a BDBN is valid, has not lapsed, and is accepted by the trustee of the fund prior to the member’s death, generally, the trustee is bound to distribute the member’s death benefits according to the terms of that Nomination.
There are many important considerations when preparing a BDBN, including the following:
- Validity:
For a BDBN to be valid, the requirements include:
- the member signs the form in the presence of 2 independent adult witnesses;
- the nominated beneficiaries are those within the permitted class of “dependants” which includes spouses, de facto partners, children, someone in an “interdependency relationship” with the member, and the Legal Personal Representative of the member’s estate (usually, the executor of their Will); and
- the member clearly indicates the percentages in which their beneficiaries are to receive the death benefits (which must add up to 100%!).
It is also important to ensure the correct form of Nomination is obtained from the fund for the member’s specific account.
- Lapsing vs. Non-Lapsing Nominations
Many superannuation funds only permit their members to prepare lapsing BDBNs. These types of Nominations must be updated every three years.
Some funds permit non-lapsing BDBNs, which will not lapse with time, and can usually only be changed if the member takes positive steps to vary the Nomination, such as preparing a new one.
It is therefore important to review whether any previous Nominations have lapsed and, if so, consider preparing a new Nomination.
- Return the signed Nomination to the fund
Once signed, it is important to ensure the BDBN is returned to the fund as soon as possible for acceptance by the trustee. If not accepted by the time of the member’s death, the trustee may not consider itself bound to follow the terms of the Nomination.
- Tax considerations
As we are not tax practitioners, we recommend clients obtain advice from their accountant and/or financial planner to consider any tax consequences of a proposed nomination. Only some categories of beneficiaries may receive superannuation death benefits without the requirement to pay a death benefits tax. We frequently work in conjunction with accountants and financial planners to ensure tax issues are considered when drafting Estate Planning documents, including Wills and superannuation death benefit nominations.
What happens where there is no Binding Death Benefit Nomination on a deceased member’s account?
If a BDBN is not permitted or is not validly made, a member’s superannuation death benefits may be distributed at the discretion of the fund’s trustee. This may be contrary to the member’s wishes.
The process of claiming superannuation death benefits may also be significantly longer and require larger volumes of documents to be submitted to the fund.
It is therefore very important to understand the rules of your particular superannuation account and to obtain legal and financial advice on the distribution of your superannuation benefits in the event of your death. Typically, preparing a Will alone may not be enough to ensure all of a person’s assets may be distributed according to their intentions following death, especially where superannuation is concerned.
The above is intended to be general advice only and is not intended to be construed as specific advice for individual circumstances. Our expert team offer comprehensive Estate Planning services: call us today on (02) 9525 8100.