The only guarantee you’ll ever get from a lawyer is that one day you will die, so it is therefore important to understand what happens to your superannuation savings when you are no longer here (dead).
Whilst this can be quite a detailed and complex area, the first and most important this to remember is that you cannot make provision for the payment of your superannuation benefits in your Will. Super is not a personal asset like your home, your car, your golf clubs or boat. If your solicitor has made provision in your Will for this, it is invalid.
It is important to remember that all superannuation Funds are Trusts. There are special rules that surround trusts and a SMSF is no different.
Fortunately a member of a SMSF can give a specific written direction to the Trustee of their SMSF when they are alive indicating what they want done with their super after they have passed on. This direction is called a “Death Benefit Nomination (DBN)”.
It depends on what is in the Trust Deed of your fund as to how a Death Benefit Nomination is to operate. The Trust Deed is the answer and a very important document not just for death benefit payments.
Subject to the Trust Deed drafted by a solicitor, it may include any or all of the following nomination types:
- Non-Binding DBN,
- Binding Lapsing DBN (i.e. to review and renew every 3 years);
- Binding Non Lapsing DBN;
- “SMSF Will” or Death Benefit Rule
As the term indicates, a Non-Binding nomination does not bind the Trustee. At the time of your death it would be up to the then Trustee of your SMSF to pay out the benefits as it saw fit. In many respects a Binding lapsing nomination has the same effect.
A Binding Non Lapsing nomination has an unlimited lifetime but usually is not specific as to the type of assets or benefits to be paid to whomever after your death.
The SMSF Will becomes a rule of your SMSF and never lapses. You can, like in your estate Will, make specific provision as to exactly who will get what when you are gone. This is very tax and asset protective. Additionally, the SMSF Will allows you to nominate who will be your replacement Trustee when you are gone. This is another protective measure to make sure things happen the way you want them to when you are no longer here.
Who can receive my super benefits?
It is important to remember though that you can only pay your death benefits to certain parties when you are dead and gone.
For there to be no tax paid when the death benefits are paid they must be (typically) paid to:
- Your spouse,
- Your de facto partner;
- Any of your children who are under age 18 and still at school;
Payments can also be made to people who are unrelated but are in a very close personal relationship, which is defined as an “interdependent relationship”.
NB. Importantly, a disabled child regardless of how old they are they will always be a “dependant” to qualify to be paid a deceased member’s death benefits.
All the parties referred to are known as “tax dependents”. If your Death Benefits are paid to them then no tax is paid on your Death Benefits.
What happens when there are no longer any tax dependants?
The benefits can be paid to adult children who are financially independent and classified as non-tax dependents. If you want your benefits paid to anybody else, it must be through your estate. There are however tax consequences if your death benefits are paid to non-tax dependents. The Executor of your Will, known as your Legal Personal Representative (LPR) can be paid your superannuation Death Benefits. If this was done you must then make provision in your Will as to who will be paid the benefits. Depending on who they are will depend on if any tax on the benefits will be paid.
Regularly today, the value of the amount that you have is super is more than the value of your assets outside super; those that represent your estate. Therefore, you should give very serious attention to how your superannuation death benefits are paid.
It is also critical that the payment of superannuation death benefits not be dealt with on their own. They play an important part in your total estate planning. Consult a solicitor who knows about super when looking at your estate planning issues and remember, not all legal practitioners know about super!!
