Does Your Will Control Your Superannuation?

Why Is Superannuation Different?

Superannuation is generally not owned personally in the same way as a house, a bank account or shares. It is held by the trustee of a superannuation fund on behalf of members, subject to the trust deed and to superannuation law.

When a member dies, their balance does not pass under the Will as a matter of course. Instead, the trustee deals with the death benefit in accordance with the fund's governing rules and any valid nomination the member has made.

• The role of the trustee: the trustee administers the fund and is responsible for deciding how a death benefit is paid, subject to the fund's rules, the law and any binding nomination in place.
• Death benefits: a superannuation death benefit can usually only be paid to a limited class of people — typically a spouse, child, dependant or the legal personal representative of the estate.
• Estate assets vs superannuation interests: estate assets are assets owned personally by the deceased and pass under the Will. Superannuation interests sit outside the estate unless they are directed into it.

This distinction is the starting point for almost every estate planning conversation involving superannuation.

What Is a Binding Death Benefit Nomination?

A death benefit nomination is the mechanism by which a member tells the trustee what they would like to happen to their superannuation when they die. Nominations typically fall into two broad categories.

• Binding nominations: if validly made and in force at the date of death, a binding nomination requires the trustee to pay the death benefit to the nominated person or persons (or to the estate), provided the nomination complies with superannuation law and the fund's rules.
• Non-binding nominations: a non-binding nomination is a guide for the trustee only. The trustee retains discretion to decide who ultimately receives the benefit, although the member's preference will usually be taken into account.
• The trustee's role: even where a nomination exists, the trustee must be satisfied that the nomination is valid and that the proposed recipient is eligible to receive a death benefit under the law.
• Keeping nominations current: nominations can lapse, be revoked by later events (such as marriage or divorce, depending on the fund), or simply become out of date as circumstances change. A nomination that is no longer valid may have no effect at all.
• Rules differ between funds: the requirements for making, renewing and revoking nominations vary between superannuation funds. The rules of the particular fund must always be checked.

Can Superannuation Be Paid to My Estate?

A member can generally nominate their legal personal representative — that is, the executor of their Will — as the recipient of their death benefit. Where that nomination is valid and effective, the trustee pays the benefit to the estate.

• Payment to the estate: the death benefit is paid to the executor, who receives it as part of the estate.
• Distribution under the Will: the benefit is then distributed in accordance with the terms of the Will, alongside the other estate assets.
• Greater control over ultimate beneficiaries: this approach allows the member to direct the benefit to a wider range of beneficiaries than would otherwise be permitted under superannuation law, including, for example, adult children, grandchildren or charities.
• Estate planning flexibility: paying the benefit into the estate also allows it to be directed into structures established under the Will, such as testamentary trusts.

Should Superannuation Always Be Paid to the Estate?

Not necessarily. Whether it is appropriate to direct a death benefit to the estate, or to pay it directly to a dependant, depends on the member's circumstances and objectives.

• Tax considerations: the tax treatment of a superannuation death benefit can differ depending on who receives it and whether they are a tax dependant of the deceased. Specific advice from a qualified tax adviser should always be obtained.
• Family circumstances: in a straightforward family situation, a direct payment to a spouse may be simple and appropriate.
• Blended families: where there are children from earlier relationships, directing superannuation into a carefully drafted Will may provide a more balanced outcome between current and former family members.
• Testamentary trusts: for members who wish to use testamentary trusts for tax planning, asset protection or to provide for children over time, the death benefit generally needs to be paid into the estate first.
• Vulnerable beneficiaries: where a beneficiary is a minor, has a disability, is financially inexperienced or is otherwise vulnerable, a structured arrangement through the estate may offer better protection than a direct lump-sum payment.
• Asset protection: for beneficiaries exposed to creditors, business risk or relationship breakdown, holding entitlements through a testamentary structure may offer additional protection.

These are some of the considerations that typically arise. The right approach depends on the member's circumstances, family and wider estate plan, and should be considered with appropriate legal and financial advice.

What Happens If There Is No Valid Nomination?

If a member dies without a valid binding nomination, the trustee will generally have a discretion as to how the death benefit is paid, subject to the governing rules of the fund and to superannuation law.

The trustee will usually consider who might be eligible to receive a benefit, including spouses, children and other dependants, and may also consider the member's estate. The trustee is required to make a decision in accordance with its duties as trustee.

This process can take time and may give rise to disputes. Where multiple potential beneficiaries consider themselves entitled, the trustee's decision can be challenged, and benefits may be delayed while objections are considered. Even where the outcome is ultimately reasonable, it may not be what the member would have chosen had they made a valid nomination.

Estate Planning Considerations

Superannuation should not be treated as a separate compartment from the rest of an estate plan. Coordinated planning helps ensure that all of a person's assets — both those that pass under the Will and those that do not — work together.

• Reviewing nominations regularly: death benefit nominations should be reviewed periodically, and whenever circumstances change, to ensure they remain valid and still reflect the member's wishes.
• Keeping nominations consistent with the Will: inconsistencies between a Will and a nomination can produce outcomes that no one intended. The two should be considered together as part of a single plan.
• Self managed super funds (SMSFs): SMSFs raise additional issues, including who will control the fund after a member's death, the interaction with the trust deed and the position of surviving trustees. Careful planning is particularly important where SMSF members and trustees overlap.
• Changes in family circumstances: marriage, separation, divorce, the birth of children, the breakdown of a relationship or the death of a beneficiary can all affect the appropriateness of existing nominations and Will provisions.
• Coordinated estate planning: advice from legal, financial and tax advisers working together will generally produce a more robust outcome than dealing with superannuation, tax and the Will in isolation.

Key Takeaways

A Will does not automatically control superannuation. Whether superannuation forms part of the estate, and who ultimately receives it, depends on the death benefit nominations and other arrangements in place at the date of death.

For many Australians, superannuation is one of their most valuable assets. Effective estate planning requires both the Will and any superannuation nominations to be considered together, and to be kept under review as circumstances change.

If you would like advice regarding your Will, superannuation death benefit nominations, SMSF succession or coordinated estate planning, contact Parke Lawyers for assistance.