Superannuation will often form a large proportion of your wealth upon your passing.
Due to mandatory employee contributions to superannuation funds over the last three decades now, even if you have minimal assets, you'll generally have a fairly substantial superannuation balance, potentially with a life insurance policy attached.
We've seen an increase in the number of disputes over superannuation death benefits recently, and there are some specific issues that arise in relation to superannuation after death that are essential to be aware of.
Importantly, many people don’t realise that superannuation is not automatically covered by your Will.
Unless you’ve prepared the appropriate documentation with your superannuation fund, superannuation (and any other additional amounts that may be payable upon death depending on the fund, collectively known as ‘superannuation death benefits’) may not be paid to the beneficiaries of your Will upon your death. This often leads to disputes, making a difficult time for your loved ones even harder.
Who can receive your superannuation death benefits?
Superannuation law provides a narrow category of people to whom superannuation death benefits can be paid, and additionally this is subject to the terms of the relevant Trust Deed for your specific superannuation fund.
Superannuation death benefits can be distributed to an Estate where they will then be included as part of the Estate for distribution to the beneficiaries in accordance with your Will.
However, unless you have put specific documentation in place with your superannuation fund, generally your superannuation death benefits will only be paid into your Estate if you do not have anyone that falls within the definition of "dependant" under superannuation law.
The relevant legislation defines "dependant" in this context as:
- Your spouse;
This is any person, irrespective of gender, to whom you were married, or in a civil or de facto relationship.
- Your children; or
This includes biological, adopted, step-children, and the children of your spouse, irrespective of their age.
- Any person with whom you were in an "interdependency relationship"
This can be fairly context-specific, but this relationship generally exists between two people who have a close personal relationship, live together, and provide financial and domestic support and personal care for one of each of them.
If you do not have specific documentation in place, once you pass away anyone who fits within these definitions can apply to receive some or all of your superannuation death benefits. It is only if you do not have anyone who fits within these definitions, that the benefits will generally then be paid to your Estate.
It is, however, at the discretion of the Trustee of your superannuation fund to determine the parties to whom your superannuation death benefits are paid and the proportion each party is to receive.
How can you ensure your superannuation death benefits go to the right people?
We make reference to "specific documentation" and how the absence of such documentation means your superannuation death benefits may not be paid to your intended beneficiaries.
The best option is nominate your intended beneficiaries by providing notice to your superannuation fund of who these beneficiaries are. There are two types of nominations for this purpose:
- Binding Death Benefit Nomination ('BDBN'); and
- Non-Binding Death Benefit Nomination ('NBDBN').
A valid BDBN compels the Trustee (and removes their ability to apply discretion to this decision) to pay your superannuation death benefits to your nominated beneficiaries.
Comparatively, as you may have inferred from the name, a valid NBDBN provides guidance to the Trustee of your superannuation fund as to how you would like your superannuation death benefits to be paid, but the Trustee ultimately retains their discretion.
If completing a BDBN, you may nominate:
- Your Estate as the recipient of the entirety of your superannuation death benefits.
This will mean your superannuation death benefits pass via your Estate in accordance with your Will, and will therefore not be subject to the same restrictions as to who is eligible to receive the benefits; or
- A specific beneficiary.
It is important to note, however, that in order for your BDDN to be valid, your nominated beneficiaries must be eligible to receive your superannuation death benefits under superannuation law. This means they must be a "dependent" under the relevant legislation as detailed above.
If you do not have anyone who meets the definition of "dependent," your BDBN must nominate your Estate.
Additionally, in order to be valid, you must ensure your BDBN or NBDBN has been prepared in accordance with the terms of the Trust Deed for your superannuation fund. There are specific formalities that may need to be observed for these documents to be valid, and you will need to make enquiries with your superannuation fund to ensure this occurs.
One final point to note in respect of BDBNs is that, by default, they lapse three years after they are made. This means that, after three years, your BDBN expires and ceases to be binding, meaning the Trustee of your superannuation fund will once again have discretion as to how your superannuation death benefits are paid. Consequently, it is extremely important to keep your BDBN up to date and ensure you have a valid BDBN in place at all times.
However, there are some superannuation funds that allow you to put in place a "non-lapsing BDBN," which means your BDBN would stay in effect until you die or you revoke the BDBN.
Case Study: The perils of an invalid nomination
You may recall a few years ago, the case of Ashleigh Petrie, a law clerk and her partner, the (now retired) Victorian Magistrate Rodney Higgins. They first made headlines in the news due to the 45 year age gap between them. Tragically, Ashleigh was hit by a car and passed away in 2019 at the age of 23.
Ashleigh had superannuation with Rest Superannuation, and after her passing her superannuation death benefits were worth around $180,000. Ashleigh had put a nomination in place with the superannuation fund; however, her nominated beneficiary was her mother. Although reports have not provided any conclusive reason as to why this nomination was not valid, it is likely due to her mother failing to meet the definition of "dependent."
Subsequently, the Trustee of Rest Superannuation decided to pay the entirety of Ashleigh's superannuation death benefits to Rodney Higgins. This led to a lengthy, and no doubt costly, legal battle between Ashleigh's mother and partner over who should receive these benefits.
The matter ultimately reached a confidential settlement, so it is unclear who ultimately received Ashleigh's superannuation death benefits and in what proportion, but there is one statement we can say with certainty: the dispute could have been avoided with a valid BDBN in place.
One final point that must be noted is that, depending on who ultimately receives your superannuation death benefits, there can be varying tax consequences as a result. For example, when superannuation death benefits are paid to a spouse, they will generally be tax-free; however, where the benefits are paid to an adult child, there may be tax payable.
If you would like legal advice to ensure your superannuation death benefits will go to the right people after you have passed away, please contact our team of experienced Wills and Estates lawyers . Simply contact our office on +61 3 9822 8588 and ask for Meghan Warren, Luke Palmer or Helen Andreou or email here and we will contact you.