Estate Planning and Superannuation

Many people are unaware that funds held inside superannuation do not automatically become estate assets, managed and distributed in accordance with their Will. Instead, superannuation benefits (including proceeds of any life insurance held within the superannuation fund) are distributed by the trustee of the fund in the event of death of the member to either those individuals nominated as the beneficiary, or potentially at the discretion of the trustee if no binding nomination has been made.

This is due to funds in superannuation being held on trust for the benefit of the member. This is different to assets held in an individual’s name which automatically become estate assets. It is only these estate assets that are dealt with via their Will, unless the individual provides specific directions to the superannuation fund nominating their estate as the beneficiary.

As a result, it is extremely important for members to have up to date beneficiary nominations in place with the superannuation provider(s), specifying who the beneficiary of superannuation benefits and insurance proceeds is in the event of the death of the member.

ELIGIBLE BENEFICIARIES

Not everyone is eligible to be a direct beneficiary of funds held within the superannuation environment. While current spouses and children are eligible beneficiaries, in most cases siblings and parents are not.

If you are intending on leaving your superannuation benefits to anyone other than your current spouse and/or children, it is best to discuss this with your adviser to ensure an appropriate nomination is made to cater for your wishes. This may include nominating your estate as the beneficiary of your superannuation benefits. This scenario will ensure the superannuation benefit is paid to your estate and funds are distributed in accordance with the provisions of your Will.

In addition to determining who is to receive your superannuation benefits, it is also important to consider the tax implications associated with your nominated superannuation beneficiaries.

SUPERANNUATION DEATH BENEFITS TAX

While your spouse is considered a dependant for tax purposes and therefore can receive superannuation benefits tax free, adult children are not and can incur superannuation death benefits tax of up to 32% of the proceeds they receive from your fund. Any beneficiary who is determined to be a non-dependant of the member for tax purposes can be subject to this death benefits tax.

The balance of every superannuation account in Australia is made up of a tax free component and a taxable component. While the tax free component is not subject to superannuation death benefit tax calculations, the taxable component is. Most members will have some level of taxable component as employer superannuation guarantee (SG) form part of this taxable component when received by the superannuation fund.

The tax treatment of the taxable component for beneficiaries is as follows:

In most cases (but not all), the taxable component of a member’s superannuation balance will fall under the ‘Taxed Component’ definition, and therefore non-tax dependants such as adult children will incur tax of 17% rather than 32%.

The following example highlights just how much this death benefits tax can be for non-tax dependant beneficiaries:

Joanne is an 82 year old widow and has a superannuation pension account with a current balance of $500,000. This balance is made up of $200,000 tax free component and $300,000 taxable (taxed) component. She has nominated her adult son, Brian, as the binding beneficiary of her account.

In the event of Joanne’s death, Brian would receive the $200,000 tax free component of his mother’s superannuation pension account without any tax being deducted. However, as Brian is classed as non-tax dependant of Joanne’s, the $300,000 taxable (taxed) component would be subject to 15% death benefits tax plus 2% Medicare levy.

This equates to a death benefit tax bill of $51,000 for Brian. He would therefore only receive $449,000 of Joanne’s superannuation pension account in the event of his mother’s death.

ABILITY TO REDUCE DEATH BENEFITS TAX FOR NON-TAX DEPENDANTS

In some instances, there are financial planning strategies available to mitigate some of this impost for beneficiaries who are classed as non-dependants for tax purposes.

These strategies, which typically involve tax free member withdrawals and recontributions to superannuation, are very complex. They are impacted by superannuation contribution eligibility rules, contribution caps, transaction costs, potential capital gains tax assessments in superannuation accumulation phase and investment market conditions.

Accordingly, they should not be implemented without a full assessment being completed and advice provided by a financial adviser, as if they are implemented incorrectly, they can put individuals in a worse position than they were previously in.

SUMMARY

Superannuation is a highly complex and regulated environment. It is critical to consider these complexities in relation to who receives your benefits in the event of death. It is therefore important to ensure you continue to discuss your requirements with your adviser to ensure your estate planning wishes are met.