KEY TAKE OUTS:
- Superannuation does not automatically form part of your estate.
- A Binding Death Benefit Nomination (BDBN) is an important tool to ensure that your superannuation death benefit is paid to specific beneficiaries or to your estate.
- There are consequences if you do not have a valid BDBN in place when you pass away.
- There are different tax implications depending upon which beneficiaries receive your superannuation death benefit
Superannuation plays a significant role in the financial well-being of Australians, often becoming one of the largest assets people accumulate throughout their careers. However, when it comes to estate planning, superannuation differs from other assets, and many people don’t fully understand how it fits into their Will.
This blog outlines the main aspects you need to consider when dealing with superannuation in your estate plan, how it interacts with your Will, and what steps you can take to ensure that your superannuation is distributed according to your wishes.
What Makes Superannuation Different?
Superannuation is unique because it is not automatically considered part of your estate. Unlike other assets, such as property, shares, or savings, your superannuation is held in a trust by the trustee of your superannuation fund. This means it does not automatically pass to your beneficiaries under the terms of your Will. Instead, superannuation is governed by the rules of the fund’s trust deed and, depending on whether you’ve made a specific nomination, by the discretion of the superannuation fund trustee.
The legal structure surrounding superannuation requires you to take additional steps if you want to ensure that your superannuation benefits are passed to the right people upon your death.
The Role of a Binding Death Benefit Nomination (BDBN)
One of the most important tools available to manage how your superannuation is distributed is the Binding Death Benefit Nomination (BDBN). A BDBN is a legal document that directs the trustee of your super fund to pay your superannuation to specific beneficiaries or to your estate.
Without a BDBN, the trustee of the fund will likely have the discretion to decide who receives your superannuation upon your death. This could lead to outcomes that don’t align with your wishes, such as payments to unintended beneficiaries or unnecessary delays in the distribution of funds.
When you set up a BDBN, you can choose between two main options:
- Direct the super to one or more beneficiaries – usually your spouse, children, or any other person that you are in an interdependent relationship with.
- Direct the super to your estate – this means the superannuation will be distributed according to the terms of your Will.
For a BDBN to be considered valid, it needs to be in writing (usually on the superannuation fund’s approved form), signed in wet ink and witnessed by two independent witnesses over the age of 18 years. If you are not choosing for your superannuation to be paid to your estate, the BDBN also needs to ensure that the beneficiaries you nominate to receive your superannuation are considered “superannuation dependents” under the Superannuation Industry (Supervision) Act 1993 (SIS).
Under this legislation, a superannuation dependent includes your spouse, your child (of any age) and any other person who you are in an interdependent relationship with.
It follows that if an individual is not considered a superannuation dependent (for example your parents or siblings), then the only way they can receive your superannuation is through your estate and the terms of your Will.
A valid BDBN ensures that your wishes are legally binding on the trustee, which removes the trustee’s discretion and guarantees that your super will go to the people you have nominated.
Why You Should Regularly Review Your BDBN
A key consideration when making a BDBN is that it generally only remains valid for three years unless you have made a non-lapsing nomination (assuming one is available under your fund’s rules). As such, it’s essential to regularly review and renew your BDBN to make sure it remains up to date and reflects your current intentions. Major life events such as marriage, divorce, or the birth of a child, can alter your estate planning needs and may require changes to your BDBN.
If your BDBN expires or is not properly updated, the trustee will once again have the discretion to decide how your superannuation is distributed.
Tax Implications of Superannuation Death Benefits
The tax treatment of superannuation death benefits varies depending on who receives the funds. Superannuation death benefits are taxed differently based on whether the recipient is classified as a ‘dependent’ for tax purposes under the law. This is different to being a “superannuation dependent” and only includes your spouse, your minor child (under the age of 18 years) and any other person who you are in an interdependent relationship with.
For instance, if your spouse or a minor child receives your superannuation, they will generally receive it tax-free. However, if the individual who receives your superannuation is not considered a tax dependent, such as an adult child, they will not receive the more favourable tax treatment.
This is an important factor to discuss with an accountant or a financial adviser, as the choice of who receives your superannuation could have major tax implications for your beneficiaries.
Superannuation and Your Will
You may wonder if you can simply include your superannuation in your Will. The short answer is no. Your Will cannot directly control the distribution of your super unless your superannuation is directed to be paid into your estate through the BDBN.
If you want your superannuation to be dealt with in accordance with the terms of your Will, then you must nominate your ‘legal personal representative’ (i.e. the Executor of your estate) in your BDBN. By doing this, your superannuation forms part of your estate and can be distributed according to your Will. This approach allows for greater flexibility, as your Will can establish testamentary trusts or other structures to protect the assets for your beneficiaries.
However, there are also potential tax savings and legal protection advantages if you choose to direct your superannuation to dependents outside of your Will, especially if the beneficiaries are financially dependent on you or are entitled to favourable tax treatment. This is why good financial and legal advice is critical in deciding the best approach for your situation.
Testamentary Trusts and Superannuation
If your BDBN directs your superannuation to your estate, your Will can set up testamentary trust for the benefit of your family members. A testamentary trust can offer several benefits, including:
- Asset protection: The assets in the trust can be shielded from creditors or from being split in the event of a beneficiary’s divorce.
- Tax advantages: Income, capital gains and dividends from a testamentary trust can be allocated between one or more of the beneficiaries to produce tax effective outcomes.
Each testamentary trust is typically controlled by the primary beneficiary as the trustee, but if the beneficiary is underage at the time of your death, a different trustee of your choice will manage the trust until the beneficiary reaches the designated age, often 18 or 21, depending on the terms of the trust.
What Happens Without a Valid BDBN?
If you die without a valid BDBN, the trustee of your superannuation fund will usually have the discretion to decide who receives your superannuation benefits. They will typically consider your dependents and may choose to distribute the funds to your spouse, children, or other dependents, based on their needs and relationships with you.
This lack of certainty can create potential conflicts or outcomes that differ from your wishes. For example, in some cases, the trustee might decide to distribute the superannuation equally among dependents, even if your Will or your personal preference would have seen the funds allocated differently.
Furthermore, the absence of a valid BDBN can lead to disputes among beneficiaries, which could result in costly legal proceedings, delays in the distribution of funds, and additional stress for your family.
The Importance of Good Advice
Given the complex nature of superannuation, estate planning, and tax laws, it’s crucial to seek professional advice from an experienced estate planning lawyer and financial adviser. They can help you weigh the pros and cons of your options, ensuring that you make informed decisions that align with your overall estate plan.
For example, they can guide you on:
- Whether it’s best to direct your superannuation to your dependents directly or into your estate.
- How to structure your Will to include testamentary trusts, where appropriate.
- The tax implications of different beneficiaries receiving your superannuation.
Additionally, they can ensure that all formalities, such as properly signing and witnessing your BDBN, are followed, as even small technical errors can render a BDBN invalid.
CONCLUSION
Superannuation is a major asset for most Australians, and it’s crucial to understand how it fits into your overall estate plan. A Binding Death Benefit Nomination (BDBN) allows you to control who receives your superannuation, whether directly to your family members as beneficiaries or through your estate via your Will.
In addition to preparing your Will, testamentary trusts, Enduring Powers of Attorney and Enduring Guardianship documents, the estate planning team at Coutts Lawyers and Conveyancers can assist you with your superannuation binding death benefit nominations to ensure that your superannuation is distributed according to your wishes.
By taking these steps, you can avoid leaving behind unnecessary complications for your family and ensure that your estate plan provides the financial security and protection you intend for your loved ones.
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