Superannuation, Blended Families and Second Relationships: Estate Planning Risks

Why Super Sits Outside the Estate

Super is held on trust for members by the trustee of the fund. On the member's death, the trustee is required to pay the death benefit in accordance with the governing rules of the fund and the Superannuation Industry (Supervision) Act 1993 (Cth) ("SISA") and its regulations. It is not property of the estate and the executor has no automatic right to it. Only if the trustee pays the benefit to the deceased's legal personal representative does the will control the outcome.

Three SISA concepts do the heavy lifting for blended families:

• Section 10(1) — "dependant": defined to include a spouse, any child (regardless of age), and any person in an interdependency relationship with the deceased at the date of death, together with a person who is genuinely financially dependent on the deceased. This is who the trustee may pay directly.
• Section 10(1) — "spouse": also defined in s 10(1), and includes a current legal spouse, a de facto partner (including a same-sex partner), and any other person with whom the deceased was living on a genuine domestic basis in a relationship as a couple. Critically, this is not confined to legally married spouses and is not automatically extinguished by separation without divorce or a formal end-of-de-facto declaration — but it is generally ended by divorce.
• Section 10A — "interdependency relationship": a separate, additional concept — two people (whether or not related by family) who have a close personal relationship, live together, and where one or each provides the other with financial, domestic and personal support. It is commonly relied on for an adult child who has moved back in to care for a parent, or for a couple who cannot meet the "spouse" test. A step-child's status as a "child" under s 10(1) is separate again, and depends on the marriage or de facto relationship with the biological parent.

The tax definition in s 302-195 of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") — "death benefits dependant" — is narrower and different: it includes the spouse or former spouse, a child under 18, a person in an interdependency relationship and a person genuinely financially dependent, but excludes adult children who are neither disabled nor financially dependent. The mismatch between SISA "dependant" and ITAA "death benefits dependant" is the single largest tax trap in blended-family superannuation planning.

The Blended-Family Risk Map

The recurring fault-lines in second-relationship superannuation planning are these:

• Second spouse against adult children of the first relationship. The trustee can pay the entire benefit to the second spouse. If the parent intends the adult children to receive part of the super, that intention must be documented — usually through a binding nomination directing a share to the estate.
• Second spouse against a former spouse. Two separate questions arise, and they must not be conflated. The first is formal validity: a binding nomination made under reg 6.17A of the SIS Regulations lapses after three years unless renewed (or is non-lapsing if the deed permits and the formalities are met), and separation or divorce does not, of itself, revoke it. The second is eligibility: on divorce the former spouse ceases to be a "spouse" under SISA s 10(1), and unless they have remarried the deceased, formed a new de facto relationship with them, or qualify under s 10A as an interdependant or are otherwise a financially dependent person, they will not be a s 10(1) dependant at the date of death. Even a formally valid, unlapsed nomination cannot be acted on by the trustee if the named person is not a dependant at the date of death — the trustee must instead exercise its discretion under the fund's governing rules, which will commonly (but not automatically or as a matter of law) result in payment to the legal personal representative. Whoever ultimately receives the benefit is then taxed under Division 302 of the ITAA 1997 according to their own status — a former spouse can separately qualify as a "death benefits dependant" for tax purposes under s 302-195, but that tax concept does not create SIS Act eligibility to receive the benefit directly. Failure to revoke a stale former-spouse nomination remains a recurring cause of confusion and litigation.
• Step-children. A step-child is a "child" under SISA s 10 while the marriage or de facto relationship with the biological parent subsists, but case law is unsettled as to whether that status continues after the biological parent's death or after separation. Nominations in favour of step-children are particularly vulnerable and must be drafted with care.
• Financially dependent minors. A minor child of an earlier relationship who is not financially dependent on the deceased is still a SISA dependant (as a child) and can be paid directly, but taxation of the lump sum and any pension will differ depending on ITAA 1997 dependency.
• Adult children with disability or interdependency. An adult child who lives with and is dependent on the deceased may qualify as a "death benefits dependant" for tax purposes as well as a SISA dependant — a materially different outcome from an adult child in the workforce.

Nomination Architecture

The direction the trustee receives from the member is the most important single lever in blended-family super planning. The available forms are:

• Binding, lapsing nomination — the statutory form under regulation 6.17A of the SIS Regulations for APRA-regulated funds: valid for three years, must be signed by the member in the presence of two adult witnesses, and must nominate only SISA dependants and/or the legal personal representative in specified proportions totalling 100%. Whether a defect in execution or a lapsed nomination is treated as no nomination at all, or instead survives as a non-binding expression of wishes that the trustee must take into account, depends on the fund's governing rules and the nomination's own terms.
• Binding, non-lapsing nomination — only available if the governing rules of the fund expressly permit it. Common in SMSF deeds; increasingly available in retail and industry funds. The High Court confirmed in Hill v Zuda Pty Ltd [2022] HCA 21 that regulation 6.17A does not apply to SMSFs at all — an SMSF binding nomination is governed solely by the deed, so its validity, form and whether it lapses depend entirely on the deed's own terms, not on the APRA-regulated-fund statutory formalities.
• Non-binding nomination — an expression of wishes that guides but does not bind the trustee. In a blended family this is often the least appropriate form because it leaves the outcome to the trustee's discretion, which for an SMSF may be exercised by the surviving spouse.
• Reversionary pension nomination — used where the deceased was in the pension phase; the pension automatically reverts to the nominated reversionary (typically the spouse), provided the reversionary remains a SIS Act dependant at the date of the member's death and the terms of the pension continue to permit it. The member's own remarriage before death does not, of itself, disqualify a previously nominated reversionary spouse — but it is a strong prompt to review whether that outcome is still intended. Reversionary nominations generally override subsequent binding nominations and are a durable planning tool, but they must be reviewed whenever the family situation changes.

For the mechanics of a valid nomination, see our binding death benefit nominations guide.

Validity and Challenge: Case Law That Matters

The following decisions define the outer boundaries of what is possible when a nomination is missing, defective or contested:

• Katz v Grossman [2005] NSWSC 934 — in an SMSF, the surviving daughter appointed by the father as co-trustee, together with her husband, resolved to pay the entire death benefit to herself, defeating a non-binding wish that the benefit be shared with her brother. Standing authority for the proposition that SMSF control determines outcomes in the absence of a valid binding nomination.
• Ioppolo & Hesford v Conti [2015] WASC 40 — the widower, as surviving trustee of the SMSF, was held entitled to pay the entire death benefit to himself, notwithstanding the deceased's will directing her superannuation to her children. The will did not bind the trustee.
• Wooster v Morris [2013] VSC 594 — a valid binding nomination in favour of the daughters of the first relationship was upheld against the second wife, who as sole surviving trustee had attempted to defeat it. Standing authority for the proposition that a properly executed binding nomination binds the trustee even when the trustee is the person who loses.
• Munro v Munro [2015] QSC 61 — a binding nomination that directed payment to "trustee of deceased estate" (rather than "legal personal representative") was invalid because it did not comply with the deed's formal requirements. A cautionary tale on drafting.
• Marsella v Wareham [2019] VSC 65 (upheld on appeal) — the surviving daughter, as SMSF trustee, paid the entire benefit to herself and excluded the widower. The decision was set aside on the basis that the trustee had not given proper, genuine and real consideration to the beneficiaries. The Court has jurisdiction to intervene where a trustee has failed to exercise its discretion properly.

The lesson from the line of authority is that a valid, carefully drafted binding nomination is enforceable and controls the outcome (Wooster). In its absence, whoever controls the SMSF trustee is often left with practical control over the decision, and Katz and Conti show that courts will often not disturb a self-benefiting decision where the trustee turned its mind to the relevant considerations. That is a description of practical risk, not a statement that control is unlawful or unreviewable: the trustee remains bound by its fiduciary duties, the deed and the SIS Act, and Marsella confirms that a decision reached without proper, genuine and real consideration of the potential beneficiaries can be set aside by the Supreme Court. The practical message for blended families is that a documented, valid binding nomination is the most reliable way to remove that decision from the discretion of whoever ends up controlling the fund.

SMSF Control After Death

More than 1.1 million Australians are members of self-managed superannuation funds, and a significant proportion of them are in second relationships. In an SMSF, three linked positions determine who controls the death benefit decision:

• Individual trustee vs corporate trustee. Neither an executor nor a surviving spouse automatically becomes a trustee or director on a member's death — s 17A SISA and the fund deed govern who may act. Where individual trustees are used, s 17A generally requires a minimum of two, but s 17A(3) permits the deceased member's legal personal representative to act as trustee in their place for the period between death and the payment of the death benefit (the "LPR concession"), without breaching the two-trustee rule. Where a corporate trustee is used, the fund can continue with a sole director, but a director is appointed and removed under the corporate trustee's constitution and by whoever controls the voting shares — not automatically by reason of being the surviving spouse or the executor of the will.
• Successor director / trustee. Some corporate trustee constitutions provide for a successor director to be appointed on a director's death; others are silent, in which case control passes according to the constitution's ordinary rules for filling a casual vacancy and the shareholding. There is no rule of law that automatically installs the surviving spouse, an adult child, or the executor as trustee or director — the outcome depends entirely on the fund deed, the corporate trustee constitution and who controls its shares. In a blended family the identity of whoever does end up in control is frequently determinative of the death benefit outcome, as Katz v Grossman illustrates. A well-drafted plan will address successor control expressly, including by nominating an independent professional director for the administration period.
• Appointor / principal. Some SMSF deeds (rare, but not unknown) include an appointor role able to appoint and remove trustees or directors. Where such a role exists it should be examined and, if necessary, varied before it is needed.

For fuller treatment of SMSF trustee succession, see what happens to an SMSF when a member dies. For this article, the blended-family point is that SMSF control is a design choice, not an accident, and in a blended family it must be designed with the specific surviving-spouse-versus-adult-children risk in mind.

Taxation of Death Benefits

Taxation is where blended-family super planning most frequently comes apart. Division 302 of the ITAA 1997 distinguishes payments to a "death benefits dependant" (as defined in s 302-195) from payments to a non-dependant:

• Death benefits dependant, lump sum — tax-free.
• Death benefits dependant, pension — taxed as pension income of the recipient, with age-based concessions (tax-free where either the deceased or the recipient was 60 or over).
• Non-dependant, lump sum — paid directly to the individual — the tax-free component is not taxed; the taxed element of the taxable component is taxed at 15% plus the Medicare levy (2%); the untaxed element (typically arising from untaxed public sector components) is taxed at 30% plus the Medicare levy.
• Non-dependant, lump sum — paid to the legal personal representative — the same components and the same 15% / 30% rates apply once the LPR distributes to the non-dependant beneficiary, but the Medicare levy does not apply, because the levy is charged on an individual's taxable income and the estate (via the trustee) is separately assessed rather than being an individual subject to Medicare.

The blended-family fault-lines are these:

• An adult child of the first relationship is almost never a "death benefits dependant". If paid directly, they pay 15% plus the 2% Medicare levy on the taxed element (30% plus Medicare on any untaxed element). If the same amount instead passes through the estate to that child, the same 15%/30% rates apply but the Medicare levy is not added — the tax outcome is not identical to direct payment.
• A second spouse (including a de facto or same-sex spouse) is a death benefits dependant and will typically receive the benefit tax-free.
• An interdependency relationship between the deceased and an adult child (typically an adult child who lived with and cared for a parent) can convert the adult child into a death benefits dependant, with materially better tax outcomes. In blended families this becomes a planning opportunity where an adult child has moved back in to care for a parent.
• Paying the super to the estate removes the Medicare levy from the calculation (the estate is not an individual for Medicare purposes) but does not change the underlying 15% or 30% component rates once the LPR pays the beneficiary. It also brings the super into the pool available to family provision claimants under Pt IV of the Administration and Probate Act 1958 (Vic).

For fuller treatment of adult-child taxation see superannuation death benefits and adult children.

Interaction with the Will and Testamentary Trusts

A binding nomination to the legal personal representative hands the benefit to the will and, through the will, to any testamentary trust structure. In a blended family this is often the cleanest coordination tool — a super proceeds trust or a testamentary discretionary trust can:

• allocate income to the second spouse for life with capital ultimately to the children of the first relationship;
• stream the taxable component to death benefits dependants where possible;
• protect adult child capital from claims by their own creditors or spouses;
• provide independent trustee oversight where the second spouse would otherwise control the SMSF.

The trade-off is complexity, cost and — where a super proceeds trust is used — the technical requirements that the trust be established in accordance with the deceased's will, that beneficiaries be death benefits dependants at the date of death, and that the trust structure not offend anti-avoidance rules such as s 102AG of the Income Tax Assessment Act 1936 (Cth). A super proceeds trust is not a substitute for legal and tax advice — it is the output of that advice.

Interaction with Family Law Proceedings

Superannuation is property for the purposes of s 79 (and s 90SM) of the Family Law Act 1975 (Cth). On separation, a super splitting order or superannuation agreement under Part VIIIB deals with the underlying interest, but does not touch death-benefit nominations. Two consequences follow for blended-family planning:

• A nomination in favour of a former spouse can remain formally valid until it lapses or is revoked under the fund's rules and reg 6.17A, and a family law property settlement does not itself revoke it. But because a former spouse who has not remarried or formed a new de facto relationship with the member is generally not a SIS Act s 10(1) dependant at the date of death, the trustee cannot pay the lump sum directly to them under that nomination — its practical effect is usually that the trustee instead exercises its discretion, commonly resulting in payment to the legal personal representative. Whoever the LPR ultimately distributes to is then taxed under Division 302 of the ITAA 1997 according to their own dependant status — a former spouse can separately meet the broader "death benefits dependant" test in s 302-195 for tax purposes, but that does not itself determine who the LPR distributes to under the will.
• A binding financial agreement between the deceased and the second spouse under Part VIIIA is not a superannuation planning instrument and does not control the death benefit. It may, however, materially affect the family provision landscape by defining what provision the second spouse is entitled to expect.

For the disclosure dimension in a Family Court context — including superannuation as one of the categories most often incompletely disclosed — see financial disclosure and hidden assets.

Common Blended-Family Failure Patterns

The disputes and near-disputes we see in this territory almost always trace to one of the following patterns:

1. The stale nomination. Nomination signed during the first marriage in favour of the first spouse; the member remarried; the nomination lapsed at three years but was not renewed; the fund defaults to trustee discretion; the second spouse receives the entire balance; the adult children discover, too late, that the parent had intended a share for them.
2. The intended-to-be-binding nomination that wasn't. The member signed a "binding" form but the witnesses were the beneficiaries; the fund treats it as non-binding; the trustee's discretion produces a different outcome. Common in DIY SMSF settings.
3. The SMSF trap. Two-member SMSF with individual trustees; on the first death the surviving spouse becomes sole individual trustee (invalidly under s 17A but often unnoticed for months); the surviving spouse admits their adult children from the first relationship as directors of a new corporate trustee and controls the death-benefit decision themselves.
4. The reversionary pension not reviewed after second marriage. Pension commenced in favour of the first spouse (reversionary); the member remarried; the reversion continued to name the first spouse; on death the pension reverts to the first spouse to the exclusion of the second.
5. The "everything to the estate" plan without tax modelling. Well-intentioned direction to the LPR that pushes the taxable component into the hands of adult non-dependant children through the will; the tax outcome is worse than the direct-to-spouse alternative, and no one warned the client.
6. The mutual-will arrangement that ignores super. Second spouses execute mirror wills agreed to be irrevocable; super is not addressed; on the first death the survivor lawfully changes the super nomination in favour of their own children, defeating the mutual-wills plan.

Dispute Pathways

When a blended-family super dispute has emerged, the available pathways depend on where the benefit is being paid:

• APRA-regulated funds. Complaint to the fund's internal dispute resolution process, then to the Australian Financial Complaints Authority under Part 7.10A of the Corporations Act 2001 (Cth). For superannuation complaints, AFCA must consider whether the trustee's decision was, in its operation in relation to the complainant, fair and reasonable in all the circumstances; if AFCA considers it was not, it may affirm, vary, set aside, or set aside and substitute the trustee's decision, but only within its statutory jurisdiction and subject to the constraints of Part 7.10A. Strict time limits apply.
• SMSFs. AFCA has no jurisdiction over SMSF trustee decisions. Challenges are brought in the Supreme Court, typically on the ground that the trustee failed to give real and genuine consideration to the beneficiaries (following Marsella). Litigation is expensive and outcomes are constrained.
• Family provision claim. In Victoria, a Part IV Administration and Probate Act 1958 (Vic) claim is made against the deceased estate — unlike NSW, where Chapter 3 of the Succession Act 2006 (NSW) creates a "notional estate" regime, Victoria has no equivalent mechanism for bringing outside assets into account. A super death benefit paid directly to a dependant outside the estate is therefore generally not available for a Victorian family provision order at all. Where the benefit is instead paid to the legal personal representative, it becomes property of the estate and is available for distribution — and for a Part IV claim — in the same way as any other estate asset.

For a substantive treatment of the disputes pathway see superannuation death benefit disputes.

A Blended-Family Planning Checklist

1. Inventory every super interest (accumulation, pension, defined benefit, SMSF), each life insurance policy held inside super, and each reversionary pension currently in payment.
2. Obtain and read the current nomination for each fund. Check date, witnessing, lapsing status, named beneficiaries and proportions.
3. For each SMSF, obtain the current deed, deed of variation history, corporate trustee constitution and ASIC extract. Identify the successor-director and appointor mechanisms.
4. Identify each SISA dependant, each ITAA 1997 death benefits dependant, and every person who could plausibly claim to be either.
5. Model the tax outcome of the most likely direct-payment scenarios and the most likely estate-directed scenarios. The comparison, not the abstract, drives the decision.
6. Decide whether the will should carry a super proceeds trust or testamentary discretionary trust. If yes, coordinate the nomination with the trust.
7. Decide whether an independent successor director of the SMSF corporate trustee should be nominated in the constitution, with instructions to hold the death benefit decision until the will has been read.
8. Review the position with the second spouse. In our experience, transparent conversation at the planning stage prevents the majority of post-death disputes.
9. Diarise a review at the earlier of any relationship change, any SMSF deed change, any will change, or the three-year anniversary of the current nomination.
10. Where a mutual-will arrangement is being used to protect adult children of the first relationship, extend it expressly to super — a mutual-wills obligation that is silent on super is likely to be defeated.

Where This Article Ends and Others Begin

For the mechanics of nominations, see binding death benefit nominations. For SMSF trustee succession, see SMSFs on death. For the disputes pathway, see super death benefit disputes. For the tax landscape for adult beneficiaries, see adult children. For the will–super interface, see superannuation and your will. This article is deliberately positioned across all of them.

Frequently Asked Questions

This article is general information only and does not constitute legal, financial or tax advice. Parke Lawyers does not provide financial product, superannuation product or investment advice.