Superannuation and estate planning

Superannuation is another area often forgotten or misunderstood in the estate planning process.

A super fund member cannot just sign a will and assume that their super benefits will automatically be paid in the way set out in their will. The super fund trustees are not bound by the deceased member’s will and may  pay the benefits to either the deceased member’s estate or to appropriate dependants as they see fit.

This means that, when you die, it is up to the trustees of your super fund as to what happens to your benefits.

In most cases problems will not arise. The trustees will do what you want them to do with your money. But problems can arise, for example, in same sex relationships, with “hidden” or multiple relationships, with “warring” children, and so on.

Moral and legal factors which may influence a super trustee’s discretion to pay a benefit to a person include:

1. the relationship between that person and the deceased member;
2. the person’s age and ability to look after themselves financially;
3. the extent of the person’s dependency;
4. the person’s financial circumstances;
5. the history of the person’s relationship with the deceased member; and
6. the strength of any other claims made by other people.

There is a further general restriction, and this is that the trustees can only pay the benefits to ‘certain persons,’ being a person who is:

1. a “super dependant” of the deceased member which means:
   • a spouse,
   • a child (of any age); or
   • a person who was financially dependent on the member at the time of death; or
2. the estate of the deceased member.

Binding death benefit nominations

Clients can override the trustees’ discretion by signing a binding death benefit nomination (BDBN).

A BDBN directs the trustee to pay the death benefits to a particular person. It allows the client to control the trustees’ discretion as to who gets the benefits on the client’s death. The trustee must pay the death benefit in accordance with the BDBN.

A BDBN may be used in conjunction with a so called “super will” to coordinate the payment of the deceased member’s super benefits with their other estate planning strategies.

A BDBN usually cannot be contested by an aggrieved person unless for some reason it is not valid. Possible reasons for a BDBN not being valid include:

1. the fund’s trust deed does not allow BDBNs;
2. the BDBN was not signed properly;
3. the client was not of sound mind when the BDBN was executed;
4. the BDBN is the result of a fraud or emotional or physical duress; and
5. the BDBN is more than three years old.

What other issues impact the decision to pay benefits from a super fund?

The “other issues” basically relate to income tax planning and asset protection issues.

On the income tax planning side the definition of a “super dependant” means death benefits are only tax free if paid to:

• a spouse of the member
• a child of the member who is under 18;
• a person who was financially dependent on the member at the time of death; or
• the estate of the deceased member where the tax commissioner is satisfied that the funds will pass to, or be held for the benefit of, any one of the persons listed above.

On the asset protection side, the payment of a large death benefit to a person suffering either financial or matrimonial difficulties is ill-advised, since it is quite possible they will not end up with the intended beneficiary. For example, if you know that your adult daughter is having marital problems, then it might be better for assets to be paid in some other way than a direct cash benefit to her.