Australians, particularly the Baby Boomer generation, hold astronomical wealth in their superannuation!
Superannuation, however, does not automatically form a part of your estate on your death. This is a very strange concept to get our heads around. After all, why isn’t an asset that a person has spent their entire working life contributing to a part of their estate on their death? The answer is because superannuation is, at its most basic level, always held in a trust structure and is governed by a lot of legislation.
The fact that superannuation does not automatically form a part of your estate on your death is the precise reason why you cannot overlook it as part of your estate plan.
The two main types of superannuation fund are Self-Managed Superannuation Funds (SMSFs) or public offer superannuation funds.
We will take a look at these two different types of funds and the benefits and drawbacks of each in the estate planning context. But first, we need to talk death benefit nominations.
Death Benefit Nominations
All superannuation funds, whether they are SMSFs or public offer funds, are controlled by a trust deed. Most people never read the trust deed of their public offer superannuation fund, but it’s there!
Because the sole purpose of superannuation funds is to fund your retirement, the superannuation fund needs to be instructed about what to do with your superannuation if you die while they are still holding investments on your behalf.
Superannuation that is paid out when you die is called a death benefit. Depending on your stage of life, the death benefit may or may not have life insurance included.
The way that you instruct your superannuation fund about what to do with your death benefit is usually called your death benefit nomination.
There are, generally speaking, two types of death benefit nomination you can make: a binding death benefit nomination and a non-binding death benefit nomination.
If you make a binding death benefit nomination, then the superannuation fund must pay your death benefit to the person/s you have nominated. No ifs, no buts. However, the superannuation fund is only compelled to follow a binding death benefit nomination if it is valid.
If you do not have a binding death benefit nomination in place, then it will be up to the organisation or people who control your superannuation, to decide where your death benefit gets paid.
Public Offer Superannuation Funds
This is the type of superannuation fund that most people recognise and use.
The general structure of public offer funds is that the superannuation fund is paid money from a person’s employer (or themselves is they are self-employed). That company uses the money paid by the employer and invests it on behalf of the person who has contributed the money. The company is the trustee and now holds the investment on trust for the benefit of the person who contributed the money.
If you live a long and happy life, then once you hit your preservation age and retire, the investments can start to be used to fund your well-earned retirement.
However, all public offer superannuation funds will ask you to do a death benefit nomination form.
If you die without a valid binding death benefit nomination form, then the trustee of the superannuation fund will need to go through a claim staking process and contact every person who is (or claims to be) a dependent of yours (spouse, child, step-child, someone else in an interdependent relationship with you and the executor of your estate).
Claim staking processes can take months (if they are simple) or years if there is a dispute. Take the recent example of Wan v BT Funds Management Limited  FCA 302. In that case, there was a dispute about whether a woman who claimed to be the deceased’s de facto spouse should receive his superannuation. The Court ultimately decided that the superannuation should be paid to the deceased’s estate (and be distributed by his Will) but the battle took FIVE YEARS after he died. If the deceased had a valid binding death benefit nomination in place, the superannuation would have been paid out in a matter of weeks following his death.
With so much of our wealth now being held in superannuation, if you go and see a lawyer about your Will and they don’t ask about your superannuation, they are not doing their job #sorrynotsorry.
Self-Managed Superannuation Funds
SMSFs, generally speaking, offer much more flexibility to their members, both in terms of investment strategy and the types of assets held by the superannuation (speak to your financial advisor if you want advice about this) and the way that the death benefit can be paid out after a member’s death.
SMSFs can be a powerful estate planning tool. If the trust deed allows it, some of the estate planning options available to an SMSF that usually are not available to a public offer superannuation fund can include:
- The transfer of assets held by the superannuation fund to a beneficiary directly, without having to be cashed. For example, the direct transfer of property to a beneficiary, rather than having to sell the property first. State revenues and taxes (such as duty) might apply to such a transaction;
- Facilitating the transfer of intergenerational wealth. For example, SMSFs can have four members, so subject to recontribution limits, this could allow parents, who have established a business where the SMSF owns the business property, to pass control of the family business in a tax effective environment and keep the property intact;
- The payment of a death benefit as a pension (think: income stream) rather than as a lump sum. This could be useful if the family want to keep the investment portfolio held by the superannuation fund intact rather than selling it to pay out a death benefit;
- The transfer of control of the superannuation fund if the children/dependants who the deceased wants to benefit are already members of the fund.
However, as with public offer superannuation funds, the rules governing how a death benefit can be paid from a superannuation fund are written in the deed. If you have an SMSF and want to explore various estate planning options, the deed needs to allow those options to occur.
This may require your estate planning lawyer to amend the deed that governs the superannuation fund. Further, discussing and deciding on effective estate planning strategies such as the ones listed above must be considered once financial and accounting advice has been received from a financial adviser and accountant.
As with public offer superannuation funds, binding death benefit nominations can be made for SMSF death benefits. Depending on your individual circumstances and estate planning wishes, a binding death benefit nomination might, or might not, be right depending on the level of flexibility you require in the payment of your death benefit. For example, in volatile blended family situations, you may wish to sacrifice the flexibility of a non-binding death benefit nomination for the certainly of a binding death benefit nomination to reduce the chance of litigation after death.
Therefore, again, if you have an SMSF and your estate planning lawyer does not insist on reading the deed, they are not going to be able to advise you properly about your estate planning strategies.
A Spanner in the Works…
For a long time now, it has generally been accepted that the laws about the requirements of valid binding death benefit nominations, the SIS Regulations, do not apply to SMSFs. As in, they only apply to public offer superannuation funds. This is why the death benefit nominations for public offer superannuation funds cannot provide much flexibility.
However, there is currently a case before the High Court of Australia, Hill v. Zuda Pty Ltd as trustee for The Holly Superannuation Fund & Ors that might be about to change that.
The matter was heard by the High Court on 5 April 2022, and at the time of writing, the decision of the High Court has not been handed down.
If the High Court decides that the SIS Regulations do apply to the death benefit nominations for SMSFs, then we may see many estate planning strategies using SMSFs rendered ineffective.
Watch this space….and in the meantime, if you have any concerns about what will happen to your superannuation on your death, or want to discuss your estate planning, please do not hesitate to reach out to the writer.
This article is intended for educational purposes only and is not to be relied upon as legal advice. If you have a legal problem or matter for which you require advice, please do not hesitate to contact the author.