How to ensure there are no nasty surprises...
by Craig Meldrum, Head of Financial Advice, Australian Unity Personal Financial Services
Estate planning is an essential part of superannuation planning. Indeed, one of the core purposes of superannuation under s 62(1) of the Superannuation Industry (Supervision) Act (SIS Act) is the provision of death benefits to be paid to the member’s legal personal representative or to any or all of their dependants, upon the member’s death.
A natural part of the advice and implementation process is having these different payments ‘work’ in accordance with each member’s wishes. But how does the member ensure that their superannuation benefit (which could consist of accumulated savings and life insurance proceeds) ends up in the hands of the people they want to benefit most?
Superannuation funds are trusts and as such are governed by a set of rules and covenants detailed in the trust deed. There is also the overlay of the tax and superannuation laws which deem who can benefit and what the relevant tax implications are.
The superannuation laws define a death benefits dependant of a person who has died to include:
the deceased person’s spouse or former spouse;
the deceased person’s child aged less than 18;
any person with whom the deceased person had an "interdependency relationship" just before he or she died; or
any other person who was a dependant of the deceased (including someone who was financially dependent on the deceased) just before he or she died.
An "interdependency relationship" exists where two people (whether or not related by family) are dependent on each other and:
have a close personal relationship (i.e. a demonstrated and ongoing commitment to the emotional support and wellbeing of both);
one or each of them provides the other with financial support; and
one or each of them provides the other with domestic support and personal care.
Exceptions to these requirements exist when physical, intellectual or psychiatric disabilities exist.
A range of other matters also has to be considered, including where the trust deed can further limit the definition of ‘dependant’ compared to what the superannuation laws allow. For example, some trust deeds might stipulate that only legally married spouses are dependants or that only minor children (that is, under 18) are dependants.
Issues to consider to help ensure certainty of outcome
Self Managed Super Fund (SMSF) members should check their fund’s trust deed to see what would happen to their benefits if they were to die. If a SMSF trustee has issued a Product Disclosure Statement to the member then what happens on death should be detailed in that document.
An important question for members is: what do they need to do to ensure their wishes are fulfilled and are not thwarted by the surviving members of the SMSF?
Taxation is also important in considering who should benefit from a superannuation death benefit payout (and in what proportion). For example, if a death benefit payout consists of any taxable component, the member’s spouse will receive that benefit tax free, whereas the member’s adult children, while eligible dependants under superannuation law, are not dependants under tax law (unless they are financially dependent or in an interdependency relationship) and as such their payout could be subject to tax up to 32% (including Medicare levy).
In considering who should benefit from a death benefit payout the member also needs to consider how the benefits should be paid, for example, would the spouse prefer a lump sum or a pension? And if other potential beneficiaries are not adequately provisioned for from either the member’s superannuation fund or from the estate, what are the chances that the trustees’ decisions might be challenged by an aggrieved beneficiary? What can trustees do to limit the possibility of costly challenges?
Where trust deeds may have traditionally given trustees total discretion as to the direction of a death benefit payment in order to allow for complete flexibility, that flexibility may not be in the best interests of members of the fund who want to direct which of their dependants, and in what proportion, should benefit from their superannuation proceeds.
There are generally four options available to SMSF members regarding directing payment of death benefit proceeds available under superannuation law. Depending on which option is preferable, the trust deed must be drafted to allow for that method.
In the absence of a member nomination the Trustee has unfettered discretion to determine to whom a death benefit is paid and in what proportion. Non-binding (standard) Death Benefit Nomination A non-binding, standard or discretionary nomination may suit where a sole beneficiary, usually the spouse who is also co-trustee or co-director of the corporate trustee, will ultimately benefit. The nomination provides guidance but is not binding upon the trustee which retains control of the distribution of the Death Benefits.
Binding Death Benefit Nomination (BDBN)
Most public offer and industry superannuation funds offer members the ability to make a BDBN which allow a Member to direct the Fund Trustee in who, and in what proportion, their Superannuation Benefits is to be paid their member benefit in the event of their death. A correctly executed, valid and current BDBN is binding upon the trustee and provides maximum control and comfort for the member. SMSFs have an advantage over public offer, corporate and industry superfunds where BDBNs must be renewed every three years. Members of a SMSF can implement ‘non-lapsing’ BDBNs which require much less maintenance however need to be considered in light of changing personal circumstances where the chosen beneficiaries may change.
Death Benefit Rule (DBR) or ‘SMSF Will’
Another advantage for members of SMSFs is the governing rules of the Fund may be drafted to allow for a specific Death Benefit Rule which provides for the death benefit instructions of the member to become a rule of the fund. In other words, it allows the Member to direct the Trustee as to how their death benefits are to be paid out and in what form.
Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, HTA Wealth and Australian Unity Personal Financial Services Ltd (‘AUPFS’) does not guarantee the accuracy or completeness of it. HTA Wealth and AUPFS do not guarantee any particular outcome or future performance. Financial Planning Services at HTA Wealth are provided by Scott Millson, Authorised Representative and registered tax (financial) adviser of Australian Unity Personal Financial Services Ltd AFSL: 234459. Any tax advice contained in this document is incidental to the financial advice in it. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in January 2015. © Copyright 2015