Many Australians hold the majority of their assets in a super fund. In this article we outline the way the assets of a self-managed super fund can be passed to beneficiaries on your death.
Self-managed superannuation funds (SMSFs) are becoming increasingly popular, with data from the Australian Tax Office showing that the total Australian and overseas assets of all Australian SMSF’s was approximately $635,500 million in September 2016.
With many people holding a large portion of their wealth in SMSFs it is vital these assets are passed effectively when the member dies. The benefits paid from superannuation after death are known as ‘death benefits’. These benefits do not automatically pass with the rest of an estate (via a Will) and you should consider making appropriate death benefit nominations when considering your estate plan.
- The total amount of your superannuation death benefits will be the value of the assets in the SMSF plus any life insurance payments on policies held in your SMSF.
- To the extent you hold any non-cash assets in your SMSF, (for example, real property) these can be passed in specie, that is, without needing to sell them to gain liquidity first.
- The default position is that the trustee of the SMSF can distribute death benefits to any person who is your dependant or to your estate (via your legal personal representative) at their discretion. However, you can direct the trustee of your superannuation fund to make distributions in accordance with your express wishes via death benefit nominations (which can be binding or non-binding).
Passing death benefits to dependants
Under the Superannuation Industry (Supervision) Regulations 1994 (Cth) death benefits may only pass in favour of a member’s legal personal representative (i.e the executor under their Will) or to one of more of their “dependants”. A dependant will include your spouse (whether same sex or de facto), your children (including adult children) and people with whom you have an interdependency relationship.
If you would like your death benefits to go directly to a specific dependant, you can implement a nomination directing the trustee of your superannuation fund to direct death benefits in a certain manner. There are two types of nomination:
- Binding nomination: Where a binding death benefit nomination exists, the trustee of your SMSF must make payment of your death benefits in accordance with the directions set out in the nomination. Binding nominations are often appropriate in situations where it is very unlikely that your circumstances will change in the future or where a family provision claim against your estate is contemplated (i.e. a claim by an eligible person that they should have been provided for under a Will).
- Non- binding nomination: A non-binding nomination acts only to guide the trustee of your SMSF as to where you would like your death benefits paid, but the trustee retains ultimate discretion to determine how those death benefits are to be paid. The flexibility provided by a non-binding nomination may be useful where the remaining members of your SMSF are immediate family members and where there may be a wide range of possible dependents at the time of death. By making a non-binding nomination, you are giving the trustee of your SMSF the ability to distribute your death benefits tax-effectively, depending on the circumstances in existence at the relevant point-in-time. This strategy will not be appropriate in all circumstances however.
Passing death benefits to non-dependants
If you would like your SMSF death benefit to be paid to someone who is not your dependant (as defined above), you should execute a binding death benefit nomination in favour of your estate. A provision can then be included in your Will bequeathing your death benefits to that person (noting there are likely to be adverse tax consequences where death benefits are passed to a non-dependant). You cannot make a binding or non-binding nomination directly in favour of a person who is not your dependant.
When considering your estate planning and death benefits there are a multitude of options and strategies which are available to ensure that your wishes for your estate are carried out effectively and efficiently after you pass. You should seek professional advice on what the best option may be for you in your particular circumstances.