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What Happens to Your Super When You Die

What Happens to Your Super When You Die

Part 1 - Rules

For most Australians, superannuation is the second biggest asset we have. It is one of the most used forms of savings for the future, but our super money is sitting in one of the most controlled environments that is regulated by the Superannuation Law.

Such as:

  1. Who can invest into super?
  2. When can you invest into superannuation?
  3. How much you can invest into super, contributions limits?
  4. How money can be contributed to super, so types of contributions you can make?
  5. When can you access your super savings?
  6. How can you access your superannuation savings?
  7. Rules around Income Stream?
  8. Tax rules around super contributions
  9. Rules for tax paid by super –
  10. Now we even have rules how to choose your superannuation fund 
  11. There are tons of rules around life insurance policy and all other insurance benefits 

I have not exhausted this list, I could continue for some time, but I won’t because for one, I don’t want to scare you with the list of rules you have to comply with (and don’t forget that those rules keep changing, so you need to keep up with the latest), but if I were to continue, we would not get to speaking about our today topic, which is another set of rules: 

Who gets your super if you pass away.

Today I will explain:

  1. Who can you nominate as your super beneficiary?
  2. Who is your superannuation dependent and who is not?
  3. What type of Death Benefit Nomination can you make? 

A character from Harry Potter and the Prisoner of Azkaban, Sirius Black said:
“The ones that love us never really leave us.”

I know, we don’t like to think about our own mortality, but planning in advance for what is going to happen to your assets if you are no longer around is an essential part of preparation of your estate, and it is simply being a responsible person for the people you love and you want to care for, even after you are gone. 

Super is different from your other assets, such as your family house, your bank account savings, your shares or even your investment property. It’s the trustee of your superannuation fund that ultimately decides who gets your super balance and any life insurance that is held within the super fund, when you die.

Super doesn’t automatically go to your estate, so it’s not automatically included in your Will. That’s why it is essential you tell your super fund trustee who you want to nominate.

And, depending on the type of nomination, they’ll either consider your nomination, be bound to pay it as you’ve nominated or make their own decision if they believe your nomination was incorrect, not obeying the superannuation law or too old to consider.

Just read this article: Super Death Benefit gone terribly wrong to see what happens if the death benefit is not created according with legislation and with no planning at all. 

Who can you nominate as your super beneficiary?

Super fund trustees can only pay your super to what we call ‘eligible dependants’ or to the ‘legal personal representative’(LPR) of your estate.

Eligible dependants are restricted to these people:

1.       Spouse

A spouse includes a legally married spouse or a de facto spouse, both same-sex and opposite-sex. 

So leaving your super savings to your spouse of 20 years is easy, just list the name of the Death Benefit Nomination Form, specify the benefit, usually 100% and when you gone, your partner will receive your super death benefit. 

What about the situation, and I have seen that happening so many times, you are no longer living together, but for whatever reason, you have separated, but not legally divorced. Therefore, there has never been a financial settlement between you and your ex-partner.

So, if you haven’t formally ended this marriage, your husband or wife is still considered your dependant under super law. Often people forget about such a little detail as changing the death nomination in a super fund, therefore if you pass away your separated partner will be very pleased to pick up the cheque of your super fund. 

One of the ugliest situations I have seen was when a gentleman died, his de facto spouse of 5 years did not received any benefit from his super and the full benefit was paid out to the man’s first wife, who he had forgotten to divorce.  While you can’t be legally married to two people, it’s still possible to have two spouses – a legally married spouse and a de facto spouse. 

2.       Child

A child includes you blood children, adopted children or stepchildren. Be aware that although a stepchild is included in the definition of a child, if you end the relationship with the natural parent or the natural parent dies, the child is no longer considered your stepchild.

However, if a financial dependency exists or if you are in an interdependency relationship with your stepchild then he can still be considered as a beneficiary of your super.

Remember though that although you can list your children of any age as your superannuation death beneficiaries, the benefit that a minor child will receive as opposed to an adult child that is financially no longer depended on you will be vastly different. Your adult children might have to pay Super Death Benefit tax, while your minors will not.

This is a “hidden” death tax, so you better receive a proper advice on this subject.  

3.       Financial dependant

Generally, a person who is fully or partially financially dependant on you can be nominated as your super beneficiary. This is as long as the level of support you provide them is ‘necessary and relied upon’, so that if they didn’t receive it, they would be severely disadvantaged rather than merely being unable to afford a higher standard of living.

Again, please be aware of all your decisions, and please take care of your family members, as I have seen so many cases of elderly abuse by strangers, other family members, or even own children. It makes your skin crawl. People pretending to be caring for elderly person and taking a financial advanced in the meantime.

I remember many years ago, when I was just few years into my financial planning career, I managed to get a great position with one of Trustee offices in Melbourne. I will not say the name, as I don’t want to be sued. I had a one client, an older, wealthy lady who lived near Bega in NSW. That is over 750km away from Melbourne.

My client owned a building of flats, she lived in one of them and the other 4 were rented. She also had a great share portfolio that I was looking after, as well as her daily high value bank account. 

At some point I started noticing strange transactions going through my client’s daily bank account, such as shopping at Woollies for an army, 3 TVs, a brand-new Subaru, new furniture. 
I immediately spoke with my manger, jump into the car, and drove all the way to find out what was happening.

To make the long story short, it was my client’s carer, who helped herself to her money. Obviously I immediately contacted the police, we registered the financial abuse, but the problem was that my client loved the carer.

She was actually a very good carer, provided great service, but just happens that in the process she also was helping herself to other benefits and my client did not have mental capacity to understand this any longer. So I could not just sack the carer, because I was worried what that would do health-wise to the lovely old lady – my client. 

But the repercussions would have been so much greater if I didn’t go there to investigate. I found out that there had never been signed any contract of employment between my client and the carer.

There were no payments made to the carer, but instead she lived in one of those units rent-free in return for the daily care service. She had the right to use ATM card to cover all living expenses for the older lady, so she kind of expended on that allowance. 

But you might not realise what it creates – not only the carer had an immediate benefit daily – for herself and all her family – remember 3 TVs, and furniture? but in the eyes of the law, she established an incredible history of financial dependence.

If the older lady died, the carer had 100% legal base to challenge the will, challenge the decision of super trustee and get a big chunk of the estate under financial dependency laws.  The older lady’s son had no idea this was happening, and he would have stand no chance to win the case. 

So on my return to Melbourne, I immediately set up an employment agreement with the carer, with pay, insurance and living arrangement as part of her employment package.

I hated the carer’s guts for doing it all, I wished I could have punished her, but I was too worried about the impact that would have made on my client. She was my priority, and the last thing I wanted was to make her worry in any way.

So I wanted to tell you this story, as it is so very easy to make mistakes that can cost you or your loved ones a fortune. Very often it is the case: “You don’t know what you don’t know” and this is exactly where the professional advice is invaluable. 

4.       Interdependency relationship

Two people have an interdependency relationship if they live together and have a close personal relationship. One, or each of them, must also provide a level of financial support to the other and at least one or each of them needs to provide domestic and personal care to the other.

Two people may still have an interdependency relationship if they do not live together but have a close personal relationship. For example, if they’re separated due to disability or illness or due to a temporary absence, such as overseas employment.

Who is not your superannuation dependent?

The people that I’ve just listed are regarded as your financial dependants according with the Superannuation Legislation, and only those can be accepted by super trustee as your beneficiaries. 

A person is not a dependant if they are your parents, siblings or other friends and relatives who don’t live with you and who are not financially dependent on you or in an interdependency relationship with you.

Again, I have seen terrible situations such as having a “girl-friend” or a “boyfriend” on a side. Please don’t list them as your beneficiaries, as most likely they will not receive any money, but you will create a huge family drama.

But if you make them financially dependent on you, for example you provide housing, pay the bills, support them with income, and that person can prove it, boy your spouse will have a shock when the death benefit is distributed.

If you do not have a dependant you should elect for your super to be paid to your legal personal representative and prepare a Will which outlines your wishes.

5.       Legal personal representative

A legal personal representative (LPR) is the person responsible for ensuring that various tasks are carried out on your behalf after you die. You can nominate an LPR by naming the person as the executor of your Will. Your Will should outline the proportions and the people you wish your estate, including your super, to go to.

What type of Death Benefit Nomination can you make? 

There are two types of nominations you can make once you decide which super dependants, or LPR, you wish to nominate:

1.       Non-binding death benefit nomination

A non-binding death nomination is an expression of your wishes, and the trustee will consider who you’ve nominated but they’ll ultimately make the final decision about who receives your super and any associated life insurance.

2.       Binding death benefit nomination

A binding nomination means the trustee is bound by your nomination. They must pay your super benefits to your nominated dependants in the proportions you set out or pay it to your estate if you nominated an LPR.

Binding nominations need to be signed and witnessed by two witnesses who are not named as beneficiaries.

Binding nominations can have an expiry date, usually 3 years. Most industry funds have those lapsing binding nominations. If you do not renew it, your super will have no nomination at all. Most super funds do send letters to members to remind of the renewal of such nominations, unfortunately lots of people do not pay attention to such letters and their beneficiaries might have problems receiving money, as at that point it is a super trustee who is making final decision who gets your money.

 A binding nomination can also be non-lapsing, and most retail funds provide this option, and they will be valid, unless you provide a new nomination to a super trustee.

The problem can appear however if you break up with your partner and you forget to change the nomination. 

So I have explained the basics of your super death nomination. It is essential to understand those options, but there is also a great deal of financial impact your decision has on your beneficiaries and/or the estate for example:

  1. When to use a reversionary nomination
  2. Is my beneficiary going to pay tax on the death benefit, if yes – how much and is there a way to reduce that tax?
  3. what to do if you don’t have any financial dependants to nominate? 

Those are the questions often asked, but they all depend on your particular situation, hence I cannot answer all those questions in this article.

So if you would like to know how to set up your Estate Planning properly, how to pass your superannuation and your overall estate to the next generation in the most tax effective, but also most secure way, you need a professional advice from an experienced financial planner, just contact me directly for personal advice. 

Retirement is a Journey NOT a Destination, so please be well prepared for the ride. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
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