Although most people assume that their superannuation will automatically be dealt with by their Will when they die, this is not the case.
The payment of a person’s superannuation entitlements upon their death (known as superannuation death benefit) is subject to a variety of rules including the superannuation legislation and the rules of the particular superannuation fund. You should also be aware that tax is payable on the superannuation death benefit in certain circumstances.
Who decides where a deceased person’s super entitlements will go?
With many super funds, it is the trustee of the fund who decides who will receive the superannuation death benefit and in what proportions, subject to the various restrictions.
This decision making process can potentially hold up the payout of the superannuation death benefit. In certain circumstances, people who are unhappy about the trustee’s decision can challenge it in the Superannuation Complaints Tribunal which can further delay the payout. Sometimes however the trustee’s decision cannot be challenged.
Some funds allow a member to make a legally enforceable direction (called a Binding Death Benefit Nominations or “BDBN”) as to whom the member wishes to receive their super entitlements upon their death and in what proportions.
Where there is a valid BDBN at the time of a member’s death, the trustee of the fund is obligated pay the deceased member’s entitlements in accordance with the BDBN. In order for a BDBN to be valid, there are a number of requirements that must be complied with.
Dangers for members of self-managed super funds (SMSFs)
Those who hold their super in a self-managed fund need to take particular care in making arrangements for the distribution of their super upon their death. The dangers of failing to do so were displayed in the case of Katz v Grossman.
In that case, Mr & Mrs Katz were members of a SMSF which the two of them controlled. They had two children, Linda and Daniel.
After Mrs Katz died, Mr Katz appointed his daughter Linda as co-trustee of the fund. Later, when Mr Katz died, Linda appointed her husband as co-trustee of the Fund.
Prior to his death, Mr Katz had nominated his two children, Linda and Daniel, to receive his entitlements in the fund in equal shares upon his death.
However, this nomination was not binding on the Trustee of the Fund and therefore it was up to Linda and her husband as Trustees of the Fund to decide who should receive Mr Katz’s entitlements. Linda and her husband resolved to pay all of Mr Katz’s superannuation (approximately $1 million) to Linda to the exclusion of her brother Daniel.
Daniel took the matter to the Supreme Court. Unfortunately for him, the Court did not change anything that had occurred and Daniel didn’t receive any part of his father’s superannuation.
This outcome could easily have been avoided if Mr Katz had put legally enforceable arrangements in place in relation to his superannuation prior to his death.
Small superannuation balances
If you think that your super balance is not large enough to worry about, think again. Many funds now automatically provide their members with life insurance cover which will form part of a member’s entitlements when the member dies.
For instance, a member with a relatively small accumulated balance of say, $25,000 could have a death benefit worth several hundred thousand dollars as a result of life cover held through the member’s fund.
Get the right advice
It is crucial that appropriate arrangements are made to ensure that your superannuation is distributed according to your wishes upon your death and in the most tax-effective way.
Consideration must also be given as to the impact of decisions regarding the division of superannuation entitlements on your wider estate planning objectives.
David Fullerton is a Senior Associate at Matthews Folbigg Lawyers who specialises in providing estate planning advice. Contact him at 02 9806 7478 or visit www.matthewsfolbigg.com.au
