Estate Planning - Superannuation
Superannuation is one area that does not fall under the scope of your Will. A Will only encompasses items owned in your name. A super fund is held in trust by the trustee of your fund. Just like asset distribution advice within your Will, your super can also be distributed as per your wishes via the nomination of beneficiaries directly through your super fund.
If you pass without having a nominated beneficiary, the trustee of your fund will have sole discretion as to where or who your super death benefit will be paid out to based on government laws pertaining to beneficiary eligibility. It is in your best interest to provide a nomination for your fund to ensure your money gets divided the way you want.
Who can I leave my super to?
When nominating beneficiaries, you may nominate one or more individuals defined as superannuation dependents. These can be:
Your spouse or de facto but not your former spouse
Your children regardless of age
Any other financially dependent person
Your estate or legal representative
By nominating your estate and having it dealt with as part of your Will, you are able to provide more detailed instructions as to how the beneficiary is to receive it. For example, you may wish your beneficiary to receive the funds at a point in time in the future rather then immediately upon death.
If nominating an individual, your super death benefit will bypass your estate and go directly to them. This means that your super will avoid probate - the judicial process that proves that a will is a valid public document - significantly cutting the time it takes for the benefit to be paid out.
Additionally, if you have nominated your spouse or dependent children under the age of 18, they will receive your death benefit tax free. Children over the age of 18 and other individuals would be required to pay tax on the taxable portion of the balance. A dependent child receiving the funds also has the option of being paid out as an income stream giving them regular payments over a period of time, and/or as a lump sum payment. Any income stream must cease when the dependent turns 25 at which point the remainder will be paid as a lump sum. All other non-dependents may only receive a lump sum.
How are the funds taxed?
There are a number of factors that affect the amount of tax payable when receiving a death benefit including:
If the beneficiary is a tax dependent
If the benefit is being received as a lump sum or as an income stream
The taxable components of the interest
If the benefit includes proceeds from an insurance policy
Age of the deceased and the beneficiary
Whether the benefit is paid from an untaxed superannuation scheme or from a taxed scheme.
A tax dependent is defined slightly differently to a superannuation dependent. A tax dependent is defined as:
a spouse of the deceased (current or former spouse, including legal, de-facto or same-sex)
a child of the deceased who is under age 18
someone who was financially dependent on you at the time of your death
someone who was in an interdependency relationship with you at the time of your death.
A non-tax dependent will therefore incur a higher tax rate on the funds received. If there is any life insurance within the super fund, this will create a non-taxed portion of your death benefit increasing further the amount of tax payable on a lump sum benefit to a non-tax dependent.
Non-binding or binding nomination?
When nominating a beneficiary for you super death benefit you can make a non-binding or a binding nomination.
For non-binding nominations the funds trustee is able to consider your wishes but still has the final say as to how it’s distributed. This can take a significant amount of time if the trustee needs to investigate your personal financial circumstances and they may instead decide to pay the benefit to the executor of your estate who can then distribute it according to your Will.
For binding nominations, the trustee of your super fund must pay out the benefit to your nominated beneficiaries in exactly the way you describe. Binding nominations can be lapsing on non-lapsing. A lapsing nomination will need to be renewed every three years or your fund will consider that no nominated beneficiary is in place.
If you have met the preservation age and you do not have a spouse or dependent children, there are strategies we can implement to move as much of the balance as possible into the ‘tax-free’ component to reduce the tax implications on the person who receives it.
Remember, in certain circumstances there are strategies we can use to improve the tax position on non-dependent beneficiaries. Contact us today to see how we can help and ensure you are in the best position possible.
Book in for your complimentary consultation - 0423 313 486 or kate@solacewealth.com
Kate Trost
Senior Financial Adviser and Director of Solace Wealth Management (AR numbers 465078/1262350)
Authorised Representative of Avana Financial Solutions (AFSL 516325).
