Superannuation death benefits nominations

A deceased’s assets other than superannuation are distributed in accordance with the terms of a Will, but superannuation is not included as an asset in a deceased’s estate and it is not accounted for by the deceased’s Will.

The death benefits nomination enables the member to direct the superannuation death benefits to preferred dependants, rather than relying on the discretion of the superannuation trustee to distribute the death benefits. It is advisable to put in place a death benefits nomination at the same time as the member is preparing a Will and Estate Plan.

This ensures the distribution of the superannuation death benefits distribution considers the Will and Estate Plan, allowing the superannuation member’s entire asset pool to be distributed according to their wishes. This can reduce the risk of claims against the superannuation member’s estate by other beneficiaries.

Even though a Will can stipulate that a beneficiary is to receive a specific gift from the estate, such a gift does not apply to superannuation death benefits. The disposition of death benefits is governed by superannuation laws under the Superannuation Industry (Supervision) Act 1993 which require that:

a) the governing rules of the superannuation trust deed may permit a member to complete a death benefits nomination nominating recipients of the death benefits; and

b) the superannuation trustee must comply with this nomination if it is valid, and

c) the notice must nominate a legal personal representative or the dependants as the recipients of the death benefits.

The different types of death benefits nominations that have separate requirements and consequences include the following:

1. Binding death benefits nomination

The member provides a written direction to the superannuation trustee setting out how to distribute the superannuation death benefits. This nomination is valid for three years and lapses if it is not renewed. If this nomination is valid at the time of the member’s death, the superannuation trustee is bound by law to follow it.

2. Reversionary beneficiary

A member in receipt of an income stream can nominate a beneficiary to whom the payments automatically revert to upon the death of the member. If the nomination is valid at the time of the member’s death, the superannuation trustee is bound by law to follow it.

3. Non-binding death benefits nomination

The member provides a written guide on how to distribute part or all the superannuation death benefits after the member’s death. However, even if the nomination is valid at the time of the member’s death, the superannuation trustee has full discretion as to the distribution of the superannuation death benefits to the deceased’s dependants or the deceased’s estate.

4. Non-lapsing binding death benefits nomination

This is a written direction by the member to the superannuation trustee determining how to distribute the superannuation death benefits. Subject to the terms of the superannuation trust deed, this nomination remains in place unless the member cancels or replaces it with a new nomination. If this nomination is valid at the time of the member’s death, the superannuation trustee is bound by law to follow it.

Essential prerequisites

Failure to correctly execute a death benefits nomination will have undesired and unfair results and to ensure the death benefits nomination is valid, the member must follow these strict requirements:

? The death benefits nomination must specify and identify the “dependants” or the “legal personal representative” of the estate that will receive the death benefits;

? Each nominated dependant must be a dependant as defined by superannuation law) at the date of death;

? The death benefits to the nominated dependants must be specific and amount to 100% of the death benefits allocated. The death benefits nomination is invalid if the allocation does not amount to 100%;

? The member must sign and date the death benefits nomination in the presence of two witnesses in the same manner as a person signs a Will. The witnesses cannot be the nominated dependants;

? The death benefits nomination must contain a declaration signed and dated by each witness stating the death benefits nomination was signed and dated by the member in their presence, and

? A binding death benefits nomination does not take effect until it has been received and accepted by the superannuation trustee.

The death benefits nomination may remain in effect even if a member’s personal circumstances change. Therefore, a member should replace the death benefits nomination if there is a significant change in personal circumstances such as marriage, divorce, the death of a nominated dependant or the birth of a child.

Binding and non-binding death benefits nominations can only be made to the legal personal representative or dependants under superannuation law. A reversionary beneficiary must be made to a dependant under superannuation law.

Legal personal representatives

Superannuation law defines legal personal representatives as ‘the executor of the will or administrator of the estate of a deceased person, the Trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person’.

Dependants

Superannuation law defines dependants as ‘the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship’.

A child of a deceased person under superannuation law includes the deceased’s biological child and extends to an adopted child, a step child, an ex-nuptial child and a child of the person as defined by the Family Law Act 1975.

Interdependency relationships

Under superannuation law there are two alternate tests for an interdependency relationship: the basic test and the disability test. The superannuation trust deed and trustee will determine whether an interdependency relationship exists.

Under the basic test, two people have an interdependency relationship if they have a close personal relationship, they live together, one or each of them provides the other with financial support and one or each of them provides the other with domestic support and personal care.

The superannuation law specifies the following factors of the relationship should be taken into account in determining whether two persons have an interdependency relationship:

? the duration of the relationship;

? whether or not a sexual relationship exists;

? the ownership, use and acquisition of property;

? the degree of mutual commitment to a shared life;

? the care and support of children;

? the reputation and public aspects of the relationship;

? the degree of emotional support;

? the extent to which the relationship is one of mere convenience; and

? any evidence suggesting that the parties intend the relationship to be permanent.

Depending on the circumstances, a superannuation trustee will consider what weight to place on these factors, however, it is not necessary to show that each of these factors exist to establish an interdependency relationship.

The disability test provides that two people are in an interdependency relationship if they have a close personal relationship and either one or both suffer from a disability which may preclude them from establishing any of the factors of the basic test, such as living together, financial or personal support.

Discretion of the Superannuation Trustee

In the absence of a valid binding death benefits nomination, the superannuation trustee will use its discretion in deciding which dependants will receive the death benefits or whether to pay the death benefits to the legal personal representative of the estate. The decision must be in accordance with the terms of the trust deed and subject to superannuation law.

If the superannuation trustee cannot identify a dependant or the legal personal representative after having made reasonable enquiries, the superannuation trustee may distribute the benefits to other persons in accordance with the superannuation trust deed or will deposit the benefits with the Australian Taxation Office as unclaimed superannuation.

Taxation of superannuation death benefits

Definitions of dependency have implications for the tax treatment of superannuation death benefits. Tax laws use similar definitions of ‘dependant’ for the taxation of superannuation death benefits. For example, the deceased’s spouse or de facto spouse, child under 18 years old and person in an interdependency relationship with the deceased are considered dependants under both superannuation and taxation law.

Superannuation and taxation law adopt the same definition of interdependency relationships except that a child of the deceased over 18 years old is always a dependant under superannuation law but not always under taxation law.

Taxation law provides that the deceased’s dependants pay lower rates of tax on superannuation death benefits than the deceased’s non-dependants. Taxation law looks at whether the final recipient of the superannuation benefits is a dependant or a non-dependant of the deceased.

Wills and Intestacy

Wills enable individuals to distribute assets as desired on death, provided the formal requirements specified in the relevant laws are met. The laws provide limited grounds to challenge a Will. In Victoria, the validity of a Will can be challenged if:

a) the deceased did not have the capacity to make the Will at the time they signed the Will;

b) they made the Will under the influence of others; or

c) a person the deceased had a responsibility to provide for, believes they have not been left a fair share of the deceased’s assets.

Where a person does not have a valid Will at the time of death, or the Will does not dispose of all the estate, the intestacy rules determine who will benefit from the deceased’s estate. In Victoria, when distributing an intestate estate, the courts prioritise the deceased’s partner, then children, then parents, then siblings.

Courts have the power to rule that superannuation death benefits are part of the deceased’s notional estate and how the notional estate is distributed. However, this power is limited to circumstances where there is a family provision claim and there are insufficient assets in the estate to satisfy the family provision order. These laws limit who can challenge a Will and an intestate estate. In Victoria, any person who can show that the deceased had a ‘moral duty’ to provide for them can make a family provision claim.

Impact of Family law proceedings

In property proceedings, the Family Court has a broad discretion to determine how the property should be distributed between the parties under section 79 Family Law Act (or section 90SM for de facto couples) and to consider the parties’ respective contributions (both financial and non-financial) to the relationship, and future needs, when making orders for the division of property following the breakdown of a relationship. 

The Family Court can only make a property order if it is satisfied that, in all circumstances, it is just and equitable to make the order. The court has power to bind third parties, such as a superannuation trustee when making such property orders.