Nominating beneficiaries for your Super
We often receive questions about superannuation benefits and how they would be paid out to loved ones in the event of death. Questions often arise because of the common misconception superannuation forms part of your estate.
Superannuation is not an estate asset and will not automatically get distributed according to your Will. Super has its own distinct legal structure where the trustee acts in accordance with the Trust Deed.
Due to this structure, your super needs to be considered separate from your Will when putting together an estate plan.
What you can do to ensure proper distribution of your Super.
To ensure your wishes are met, you can provide your super fund with a Beneficiary Nomination to advise how you would like your super to be distributed. Each super fund has a different form, though will typically offer you the opportunity to nominate the following individuals to receive your superannuation benefit:
- Spouse (legal and/or de facto);
- Children (including step, adopted, ex-nuptial);
- A financial dependant at the date of death; and
- A person who is in an interdependent relationship with you at the time of your death.
By making a beneficiary nomination to any of the above, you can bypass your Estate and the normal super Trustee process. This nomination is especially important for blended families or in instances where there is an increased likelihood your estate may be contested. It can also speed up the payment to your beneficiaries as Trustees act directly on your instruction rather than via a complex and time-consuming legal process.
Alternatively, you may elect for your legal personal representative (LPR), who is the executor of your estate, to distribute the benefit according to the terms of your Will.
How your superannuation will be taxed.
Superannuation death benefits are taxed depending on who your beneficiaries are and the breakdown of tax-free and taxable components of your fund.
Your spouse, dependants, and those you have an interdependent relationship with are all able to receive your superannuation death benefit completely free of tax.
The tax-free component of your superannuation will always remain tax-free, regardless of whom your beneficiary is. Any non-dependant beneficiaries, however, will be taxed on your super’s taxable component. The most common non-dependant beneficiaries are adult children. These non-dependant beneficiaries are commonly children over the age of 18 and they will pay 15% tax plus 2% Medicare Levy on the taxable component.
Where a super death benefit is directed to your Legal Personal Representative (your estate), the taxable component will not be charged the additional 2% Medicare Levy.
Who you should (for tax considerations only) nominate.
It is really a matter of personal preference, however, based purely on superannuation and taxation laws it is most advantageous to nominate your spouse/partner as the sole beneficiary of your super benefits.
If this is not possible or you would like to nominate non-dependent, adult children as beneficiaries, it may be appropriate to have your super benefits paid out via your estate. By paying it through your estate, as opposed to directly, your children would save the 2% Medicare Levy.
Can I reduce the tax payable by my adult children?
If you would like your adult children to receive your superannuation benefit, it may also be possible to reduce the tax payable by implementing a “re-contribution strategy” or withdrawing your money from the superannuation environment.
The re-contribution strategy may allow you to remove or reduce the taxable component (on which tax is payable by adult children). The process involves withdrawing money from your superannuation fund and adding it back in.
To implement this re-contribution strategy, you need to be able to access your super and be eligible to contribute to superannuation. Both have age limitations and potential restrictions on the amounts you can withdraw and contribute.
You need to expand a little on the nominating beneficiaries. We are going through this battle at the moment. Super funds allow you to nominate preferred beneficiaries – but these are not legally binding. The super fund can CONSIDER paying out some monies to the nominated beneficiaries but they may not get the amount or percentage you nominate. You MUST fill in a BINDING nomination form and then you can be assured they will get the money as nominated. My daughter did not lodge a binding nomination form and we are going through a very long, protracted & expensive legal battle to get a reasonable amount to be allocated to her only son 14 YO (into trust) to assist him in his future. Her partner has taken the house, all her shares in her empoyer’s company (given to her on years worked) and then trying to take almost all of the Super monies and insurance payout. She did not have a will either.
Thanks for your input, Joan, you make a very valid point which our article does not address.
There is a clear distinction between a binding and non-binding nomination, with the former providing a lot more certainty of where your Superannuation will be paid.
Not all Superannuation funds permit binding beneficiary nominations which can be a limitation.