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Myth busting – What happens to your super when you die?

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Not sure?   Well, you are not alone.  Despite being one of our biggest assets, many Australians have no idea what happens to their superannuation when they die.

Changes to the law over the last few years have made it even more mind-boggling to try to work out and plan for what might happen after death.  Not to mention, the ever growing myriad of myths that float around just too really make things tricky.

As lawyers dealing with super every day, we frequently meet clients who have been falsely comforted by myths they have heard regarding the way that their super will be dealt with after they die.  Here are a few of the common myths …

Myth 1 – I’m OK, I did my Will

Firstly, if you have a Will, congratulations, research estimates that you are in a minority, with less than ½ of Australians having a valid Will. But that is a whole different article.

Super is not an estate asset.  This means that it does not automatically get dealt with via your Will, unless you actually direct it to be left to your legal personal representative (LPR) such as the executor of your estate.

If you want a say about who gets your super after you die and how they receive it – that is, as a lump sum or income stream (if possible) for example, then you need to make sure that you complete a death benefit nomination form with your super fund.

Easy, right?  Unfortunately not.  Super law is complex and it just keeps on getting more and more complex.  What type of nomination – a preferred nomination, a binding death benefit nomination or a reversionary pension? Who is eligible as a beneficiary? How can you minimise tax?  How can you stop or reduce the risk of challenges?  These are all live issues and if you have a blended family or if superannuation is your main asset, then how to deal with you super after death is an even more complex minefield from an estate planning perspective.

Myth 2 – You can give your superannuation to anyone using a death benefit nomination

I’m afraid not.  The law dictates who is an eligible beneficiary of your superannuation.

Many clients say that they have completed super death benefit forms have been accepted by their super fund.  This acceptance by super funds of the nominations leads to belief that the nomination must have been valid. In truth, most super funds do not consider the validity of the nominations made, they simple file them.  Often times, the nominations do not comply with the legislation and in many cases nominate an ineligible beneficiary.  If the nomination is ineligible, the super fund can’t comply with it after you die.

This is not to say that you can’t channel your super to ineligible beneficiaries but getting it to them means being much more sophisticated than simply naming them on a death benefit nomination and posting it off to the super fund.

Myth 3 – Children are always eligible beneficiaries

Working out whether someone is an eligible beneficiary can be complicated, especially for blended families.  Biological children will always be eligible beneficiaries of their biological parents super (unless they are adopted out) but what about step-children?  Well the answer is, it depends.

There are some circumstances, for example, where the first spouse dies and the marriage was intact at the date of death, then yes, generally this would mean the step-children of that deceased spouse would be eligible.  But in other circumstances, for example, when the second spouse dies, the children of the first spouse to die are no longer considered children under superannuation legislation.  If they are nominated on the death benefit form, it will be held to be invalid (unless they are eligible under another category of beneficiary).

Myth 4 – Beneficiaries are all born equal

So you want to give your super to your kids?  Sounds pretty logical but be aware that not all beneficiaries are considered equal in the eyes of super legislation.  Some beneficiaries such as adult children may be exposed to significant amounts of tax on super death benefits whereas other beneficiaries such as spouses, children under eighteen and adult children with disabilities may not be taxed.

For lump sum death benefits, the taxable component is paid tax-free to a tax dependant, such as your spouse. It is taxed at 15 per cent (or 30 per cent from an untaxed fund such as an old government scheme) plus 2 per cent Medicare levy if it is paid to a non-tax dependant, like an adult child.

Understanding these issues and considering who to give your superannuation to and the best way to give it to them may save your beneficiaries thousands and really make them equals regardless of circumstance.

Myth 5 – Transfer balance caps only apply to rich people

The transfer balance cap is a limit set on the amount of money that can be transferred from an accumulation account to a tax-free retirement account. The cap sits at $1.6million so most people are not affected.

However, when your spouse dies, if they give their super to you then the combined balance could reach or exceed the cap. Taking this potential issue into account during your estate planning is important, otherwise, your spouse could be negatively impacted after your death.

Myth 6 – My affairs are simple – I don’t need advice

Well given the myths busted in this article, if you have super, it’s clear that you may benefit from some legal and financial advice to ensure that your wishes are carried out after you die.

Here at CRH Law, our team of experienced lawyers which includes our Accredited Specialist in Succession Law Margaret Arthur and SMSF Special AdvisorTM Rebecca Edwards, we are well placed to help you to achieve the best possible estate planning outcomes for you and your family giving you peace of mind for the future.

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