Superannuation and Estate Planning – What You Need to Know
When planning for the future, most people focus on their will and physical assets such as property, bank accounts and personal belongings. However, your superannuation fund is often one of your largest financial assets – and your will does not automatically cover it. Understanding the superannuation beneficiary rules, how superannuation death benefits are paid and the role of binding nominations is essential to ensuring your superannuation is distributed according to your wishes.
At Velos & Velos Lawyers in Melbourne, with over 45 years of experience, we help clients integrate superannuation into their overall estate plan, avoiding common pitfalls and protecting their loved ones.
Superannuation and Wills – How They Interact
Your superannuation benefits are held in trust by your super fund and are governed by the fund’s trust deed and superannuation law. This means that, unlike most other estate assets, superannuation does not automatically form part of your deceased estate and is not necessarily distributed according to the terms of your will.
The trustee of your superannuation fund has the discretion to decide who receives your superannuation death benefits, unless you have made a valid Binding Death Benefit Nomination (BDBN), binding beneficiary nomination, or another valid beneficiary nomination.
This makes it critical to consider superannuation and estate planning together – rather than treating them as separate matters.
Who Can Receive Your Superannuation Death Benefits?
Under superannuation law, your super death benefit can only be paid to:
- Your legal personal representative (LPR), often the legal representative named in your will
- Your spouse or de facto partner
- Your children (including adult children)
- A person with whom you have an interdependency relationship
- Any person who was financially dependent on you at the time of death.
A legal personal representative can receive the superannuation death benefits paid to your estate, allowing them to be distributed according to your will. Alternatively, you can direct your superannuation fund to pay your superannuation directly to eligible nominated beneficiaries.
Death Benefit Nominations – Binding vs Non-Binding
When completing your beneficiary nomination, you can usually choose between a:
- Binding Death Benefit Nomination (BDBN)
- Legally obliges the trustee to pay your death benefits exactly as nominated.
- Must comply with strict form and witnessing requirements.
- Typically valid for three years (lapsing nomination) unless your fund’s trust deed allows it to be a non-lapsing nomination.
- Non-Binding Nomination (NBN)
- Indicates your wishes, but the trustee has discretion.
- The trustee considers your nomination along with other potential beneficiaries.
A reversionary beneficiary nomination applies if you are receiving your super as an income stream (pension) – the payments will automatically revert to your nominated beneficiary upon your death.
Superannuation Death Benefits Paid to Your Estate
If you nominate your legal personal representative, your super benefit is paid to your estate and distributed under your will. This approach can be useful for:
- Complex estate planning involving multiple beneficiaries
- Asset protection through testamentary trusts
- Managing tax implications under taxation law
However, this also means the superannuation is exposed to any claims against your estate – for example, under family provision legislation.
Tax Implications of Superannuation Death Benefits
The tax treatment of a super death benefit depends on:
- The type of benefit (lump sum or income stream)
- Whether the recipient is a tax dependant under tax law
- The components of the superannuation – tax-free component vs taxable component
For example:
- A lump sum paid to a tax dependant (such as a spouse or child under 18) is generally tax-free.
- A lump sum paid to a non-dependant may be subject to significant tax.
An experienced estate planning lawyer – working alongside your financial adviser – can help you structure your estate plan to minimise tax liabilities.
Potential Pitfalls – Hypothetical Case Studies
Case Study 1 – An Expired Binding Nomination
Michael nominated his de facto partner, Anna, as the sole beneficiary of his superannuation using a BDBN. He assumed this meant she would automatically receive his super. Unfortunately, the BDBN expired after three years, and Michael never renewed it. Upon his death, the trustee exercised discretion and split the benefit between Anna and Michael’s estranged adult son.
Lesson: Review your death benefit nomination regularly to ensure it remains valid and reflects your wishes.
Case Study 2 – Leaving Superannuation in a Will Without Nomination
Helen’s will left all assets, including her superannuation, to her two daughters. However, she did not nominate her legal personal representative as a beneficiary. The trustee instead paid the entire superannuation balance to her new husband, with whom she had an interdependent relationship.
Lesson: If you intend for your superannuation to be distributed under your will, you must nominate your legal personal representative.
Case Study 3 – Complex Family Relationships
David, a widower, was in a long-term personal relationship with Lisa but had adult children from his first marriage. His BDBN nominated Lisa as the sole beneficiary. After David’s death, his children challenged the nomination, claiming an interdependency relationship with him in his final years. The matter became a prolonged legal dispute.
Lesson: In blended family situations, professional advice is essential to avoid disputes over superannuation benefits.
The Role of Lawyers in Superannuation and Estate Planning
At Velos & Velos Lawyers, we provide tailored legal advice on superannuation and estate planning, including:
- Reviewing your superannuation fund rules and trust deed to understand your options.
- Preparing valid Binding Death Benefit Nominations and binding beneficiary documents that align with your overall estate plan.
- Advising on tax implications and taxation law issues for different beneficiaries.
- Coordinating your superannuation nominations with your will, Enduring Power of Attorney and other estate planning documents.
- Advising trustees and executors on claiming super death benefits.
- Assisting with self-managed superannuation fund (SMSF) succession planning.
- Managing disputes over non-lapsing nominations and lapsing nominations.
Final Thoughts on Superannuation Beneficiary Rules and Estate Planning
Your superannuation is a significant part of your wealth. Failing to include it in your estate plan – or misunderstanding the superannuation beneficiary rules – can result in outcomes that are very different from what you intended. By reviewing your superannuation and wills together, making appropriate death benefit nominations and seeking professional advice, you can ensure your superannuation benefits are distributed in the way you choose.
Frequently Asked Questions (FAQ) – Superannuation and Estate Planning
1. Can I leave my superannuation in my will?
Not directly. Your superannuation fund is held under a trust structure and is not automatically part of your will. To direct your superannuation death benefits to your estate, you must nominate your legal personal representative as the beneficiary.
2. What is a Binding Death Benefit Nomination (BDBN)?
A BDBN is a legally binding direction to your super fund’s trustee, instructing them to pay your super benefit exactly as nominated. It must meet strict form requirements and can be a lapsing nomination or a non-lapsing nomination, depending on your fund’s rules.
3. What’s the difference between a lump sum and an income stream?
A lump sum is a one-off payment from your superannuation fund, while an income stream provides ongoing payments to a beneficiary, often a reversionary beneficiary.
4. Can my Self-managed superannuation fund (SMSF) have different rules?
Yes. An SMSF is governed by its own trust deed, which may have unique provisions for death benefit nominations, non-lapsing nominations and beneficiary eligibility.
5. Who can I nominate as a beneficiary?
Eligible recipients under superannuation law include your spouse, de facto partner, children, someone with an interdependent relationship, your legal representative or your estate.
6. What are the tax implications of a super death benefit?
The tax depends on the tax-free component and taxable component of your superannuation, your relationship with the deceased and whether you receive it as a lump sum or income stream. A financial adviser and lawyer can help minimise unnecessary tax.
7. Why involve an estate planning lawyer?
A lawyer ensures your estate plan is legally valid, tax-efficient and integrated with your superannuation strategy. They can also help update your will, power of attorney and Enduring Power of Attorney to align with your superannuation arrangements.
Contact Velos & Velos Lawyers
With over 45 years of experience, we can help you structure your superannuation and estate planning to protect your assets, minimise tax and provide for your loved ones. Call 03 8379 1000 to book a consultation.
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