Simple steps to protect your super and avoid death taxes

This article is intended to be a succinct explanation of key concepts you should understand about super beneficiary nominations.

It also covers specific steps you can take to ensure your nomination is not only valid, but that your beneficiaries aren't taxed up the wall.

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Alright, let's get stuck into it...

WHAT IS A BENEFICIARY NOMINATION?

Just as you would have a will in order to provide instructions for the distribution of your estate, you have a beneficiary nomination to provide instructions for the distribution of your super. Your super is NOT an estate asset.

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WHAT HAPPENS IF YOU DON'T HAVE A BENEFICIARY NOMINATION?

In the absence of a beneficiary nomination, the 'trustee' of your super fund will make a decision about who's a valid beneficiary, and therefore who will receive your super. The trustee makes this determination based on a valid beneficiary making claim to the super, or they may wait until you have a legal personal representative who's in charge of administering the estate, which basically means that your super gets added to the estate.

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If you have a will, they will likely refer to the will to make an informed decision in determining eligible beneficiaries.

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WHO CAN BE A SUPERANNUATION BENEFICIARY?

Beneficiaries must be defined under superannuation law as a 'dependant'. This would be a spouse or de facto spouse, child of any age, or someone who can prove interdependence (generally if you relied on each other financially, but there's a bit more nuance to it in some cases).

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Unless your siblings or parents - or any other extended family for that matter - are in a interdependent relationship with you, they are not classed as 'dependants' and therefore a nominating them would be pointless as the nomination would be deemed invalid.

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WARNING: Just because someone is a 'dependant' under superannuation law, it doesn't mean they're a 'dependant' under tax law. If you have adult children, for example, they are a dependant under superannuation law but may not be a dependant under tax law, which means that superannuation proceeds paid to them may be taxable. This could see up to 22% of the taxable portion of your super going to the ATO instead of your intended beneficiaries.

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If your beneficiary is a dependant under both superannuation law AND tax law, they should receive the amount tax-free.

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BINDING VS NON-BINDING BENEFICIARY NOMINATIONS:

There are generally two types of beneficiary nominations for your super. I'll explain the differences between them.

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1.) Binding: This is the equivalent to a will for your super. As long as the nomination is 'valid' (you've chosen eligible beneficiaries, and your nomination is properly witnessed), the super fund must follow your instructions when paying out your super.

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2.) Non-binding: This is where you provide instructions to the super fund about who you'd like to receive your super, but they aren't legally obligated to follow your instructions if the nomination is invalid, or there are other valid beneficiaries who weren't nominated and are appealing to be seen as a valid beneficiary.

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There's one more beneficiary nomination type if you've converted your super account to a 'pension' account, or an 'income stream' account. This is typically when you reach the minimum age to start accessing your super. In this instance, you also have the option to choose a 'reversionary beneficiary', which is where your nominated beneficiary continues to receive an income stream from your super instead of being paid it all out in a lump sum.

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LAPSING VS NON-LAPSING BENEFICIARY NOMINATIONS

Most industry super funds, and some retail super funds, only provide you with a 'lapsing' beneficiary nomination, if you choose the 'binding nomination' option. This means that it's only valid for 3 years, after which is reverts to a 'non-binding' nomination.

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It's important to take this into account when choosing your super fund and nomination type, because if you lose mental capacity, you won't be able to make a binding nomination again in the future.

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A 'non-lapsing binding' nomination is just as it sounds - it remains in place indefinitely until cancelled or changed. Just ensure you update your nomination if any of your beneficiaries are no longer dependants under superannuation law.

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WHAT TO DO IF YOU DON'T HAVE ANY 'VALID' DEPENDANTS

There are many cases where people do not have a spouse, child, or financial dependant to leave their super to. In these cases, you can either have no beneficiary nomination (typically the option you'd take if you don't have a will) or nominate your legal personal representative (the executor of your estate). The latter will be a much smoother process for your executor.

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WHAT ELSE DO I NEED TO KNOW?

If you have life insurance in your super, the proceeds from that life insurance policy will be paid into your super balance before being paid out to your beneficiaries. You should keep this in mind when nominating your beneficiaries in case you have special wishes for the lump sum.

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WARNING:

If you have separated from your partner but you are still married, they are still deemed to be your 'spouse' under superannuation law and tax law. It's important to keep this in mind and evaluate the suitability of your beneficiary nomination if you do not want them to have your super when you pass.

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ABOUT ME:

I'm a financial adviser who helps healthcare professionals all over Australia to feel more comfortable with the financial decisions they're making while avoiding making painfully common mistakes that make life unnecessarily harder.

DISCLAIMER

This information is for general information purposes only and is not (and cannot be construed or relied upon as) personal advice. No investment objectives, financial circumstances or needs of any individual have been taken into consideration in the preparation of the content. You should always obtain professional advice to ensure products and strategies are suitable for your circumstances.