Death and your superannuation entitlements

Superannuation benefits are not automatically part of a person’s will. Upon the death of a member, the trustees of the superannuation fund need to identify to whom the member’s benefits should be paid. In most cases, death benefits are paid directly to the deceased’s dependants rather than through the estate. Under superannuation laws apart from a dependant, the only other party that could be paid a superannuation death benefit is the person’s legal personal representative.

In the case of a Self-Managed Superannuation Fund (SMSF), the trustees at the time of death of the member have ‘control’ over where the member’s benefits are paid, irrespective of what the will says. The death benefits will need to be paid to dependants or their legal personal representative, but the trustee can decide, in the absence of a binding death benefit, if they wish to pay the benefits to the legal personal representative or which dependants the benefits are paid to.

Under superannuation legislation a dependant and a legal personal representative are defined as follows:

Dependant, in relation to a person, includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.

Legal personal representative means the executor of the will or administrator of the estate of a deceased, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person.

There are a few considerations when deciding who to leave superannuation death benefits to which include:

  • Possible Tax Consequences to the Recipient
    • If paid to a spouse generally no tax.
    • If paid to a minor child generally no tax.
    • If paid to another person for whom there was an interdependent relationship generally no tax.
    • If paid to the legal personal representative to be dealt with through the estate, possible tax of 15% on the member's taxable element in their entitlements (most people have taxable element entitlements). This tax would be paid by the estate; and
    • If paid to an adult child with no dependency to the deceased, then the taxable element is taxed at 15% + Medicare of a further 2%. An effective tax rate of 17% on the death benefits payable by the recipient.
  • How or if, any Beneficiaries or Potential Beneficiaries to the Deceased might Challenge the Estate
    • By leaving benefits to a spouse the estate is left out of the decision on how the benefits are paid and tax can be managed.
    • By leaving the benefits to the estate via the legal personal representative the super benefits are exposed to any risks relating to beneficiaries or possible beneficiaries of the estate challenging and attempting to get paid part of the super benefits.
    • If leaving directly to adult children from super, then the estate has no power to direct funds from super. Considered especially in blended families.
  • How the Wealth will Transfer on the Death of the Beneficiary
    • By leaving benefits to the legal personal representative, the estate may place funds in a testamentary trust for the benefit of the current spouse and children. This further protects the wealth on the death of the current spouse so as to ensure wealth continues to be passed through the deceased family. Also, to not end up with stepchildren or future spouses or children their spouse may end up with.

It is important that all super funds are made aware of a person’s desired death benefit beneficiary. Even more so in SMSFs where control might end up with parties that are conflicted to follow the deceased wishes.

I encourage all to talk to their SMSF accountant or financial adviser on this topic to ensure all risks are considered. If necessary, they can then assist with further discussion on the topic and help formulate a brief for discussion with an estate planning lawyer.

If you have questions after reading this article or have an SMSF and want to talk further please contact PKF Sydney & Newcastle on (02) 4962 2688 or email [email protected] and one of the team will contact you to assist.

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