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Estate Planning and Superannuation

Dealing with Superannuation is an important aspect of most estate plans.

If you have funds in Superannuation, there is a good chance benefits may be payable after your death.

This might be because you have not cashed in all your superannuation during your lifetime. Alternatively, you might hold a life insurance policy in your fund.

Whatever the case, there are essentially two options for dealing with these superannuation “death benefits”.

One option is to do nothing during your lifetime. The trustee of the superannuation fund will then decide how to distribute the death benefits amongst your dependants.

Alternatively, you can make a death benefit nomination, specifying who should receive you superannuation death benefits after you die.

This fact sheet outlines the regulations and tax consequences around superannuation death benefits.

Who can be nominated to receive your superannuation death benefits?

You can only make a nomination in favour of:

  1. one or more of your “dependants”
  2. your legal personal representative i.e. the executor of your will or administrator of your estate ("LPR")
  3. If you wish to leave superannuation to a non-dependant, the superannuation proceeds will need to pass through your estate

Who are your dependants for superannuation purposes?

For superannuation purposes, “dependants” is defined broadly and includes:

  1. your spouse (which includes any person who lives with you on a genuine domestic basis in a relationship as a couple); 
  2. any child of yours (which includes an adopted child, a stepchild and any child of your spouse); and

  3. any person with whom you have an “interdependency relationship”, which basically means any person with whom you have a close personal relationship and provide each other with financial and domestic support.

Tax considerations

When deciding who to nominate, you should bear in mind the different tax rates that could apply.

The rate of tax on superannuation death benefits primarily depends on two things:

  1. what kind of death benefits will be payable
  2. whether the beneficiary is a “death benefits dependant” for tax purposes.

Where death benefits are paid to your LPR, the LPR must determine who “may be expected to benefit” under the terms of the your Will, and pay at the applicable rate as if that beneficiary had received the funds directly. However, whereas the beneficiary may be liable to pay the 2% Medicare Levy, the LPR will not pay this. 

Types of death benefits

There are three types of benefits, namely:

  1. the “taxed element” of the taxable component, including concessional contributions and earnings generated during the accumulation phase 
  2. the “untaxed element” of the taxable component, including most life insurance proceeds

  3. the “tax free” component, including non-concessional contributions for which the member did not receive a tax deduction. No tax is payable on this component.

Who are your “death benefits dependants”?

Not all “dependants” for superannuation purposes are
“death benefit dependants” for tax purposes. A “death benefits dependant” for tax purposes is defined in section 302-195 of the ITAA97 and includes:

  1. your current or former spouse or domestic partner
  2. your child under 18 years of age
  3. any other person “financially dependent” on you, or with whom you had an “interdependency relationship”, just before your death.

Tax Rates

The relevant rates of tax applicable to lump sum death benefits are shown in the following table (inclusive of the Medicare Levy where applicable).

Table 1. Death benefit paid as a lump sum

  Payment to a person who is not a “death benefits dependant”  Payment to a “death benefits dependant” 
Taxed element MTR – but not exceeding 15%* Nil
Untaxed element MTR – but not exceeding 30%*

*“MTR” means the recipient’s marginal tax rate.

*Due to the tax offset under ITAAA97 s. 302-145

Superannuation death benefits may sometimes be paid by pension to a death benefits dependant, however only a limited number of superannuation funds will offer this option.  Self Managed superannuation funds are able to take this option.  As superannuation pensions can be very tax-effective, financial advice on this option should be considered on a case by case basis. 

Summary

Your Estate Planning should consider:

  • who will receive your superannuation pension or superannuation proceeds;
  • whether your superannuation death benefits will be paid in the form of a pension or lump sum;
  • whether a lump sum will be paid directly or via your Estate; and
  • how the recipient will be taxed.

Both financial and legal advice may be required.

If you have any queries, or require further information specific to your needs, please contact Daniel Kelliher or Stefan Manche.

As experts in this area Russell Kennedy regularly distributes information and hosts seminars on this topic. To subscribe to our mailing list please click on 'Join our industry mailing lists' at the bottom of this page.