A look inside superannuation death nominations
We have seen versions of this scenario many times:
Josh is 32 years old. A few years ago, after many years of saving, Josh moved into his first home, leaving his mum who had raised him as a single parent. Josh had signed a binding death benefit nomination giving his superannuation to his mum, but he did not make a Will ... after all, he didn’t have many assets so he reasoned that he didn’t need a will – after he is only 32!
Soon after, Josh meets a new partner who moves in with him - quickly. Then, just five months later, very sadly, Josh passes away suddenly.
Who do you think would - or should - be left with his superannuation?
In this scenario, Josh’s super funds proceeds went solely to his new partner. The death benefit nomination that nominated his mother failed because the adult member was not living with, or financially dependent on mum (or vice versa), and the new partner was financially dependent on him at the date of his death. Legally correct. Yet, some might say, morally questionable.
So, who decides who gets your super?
In 2020, the Global Pension Assets study concluded that Australia's pension market is the most successful in the world, having increased by 11.3% per year over the last 20 years.
So, with all this retirement money growing in our funds, it begs the question: Where does any leftover super go when we die? Many times, over the years we have explained to clients that their superannuation account balance is not included in their estate. Due to differences in tax compliance, superannuation is not considered an asset by law until you are of pension age. Everybody needs to understand that superannuation is held by the super fund in a trust structure governed by a lot of legislation. So, it needs to be considered separately in your estate planning.
Now that we know super need to be delegated separately, how do we ensure that it goes to the chosen person?
We should all complete and sign a superannuation death benefit nomination form.
Who can be nominated as a beneficiary?
Even with a nomination, not everyone is allowed to receive your super balance upon your passing. To be considered as a possible beneficiary of your superannuation, the person must be considered a dependant - or have a financially interdependent relationship with you. You can instruct the executor of your Will to distribute your superannuation to other people, even if they are not considered a dependant. But if this is your goal, it's always best to seek our advice to see what's possible.
However, there are a number of issues with superannuation death nominations. With super nominations, there's a lot of confusing legislation, and many issues can arise. Challenges with binding death agreements often result due to the individual's limited knowledge of superannuation rules, paired with a lack of follow-through from the superannuation funds.
Many superannuation funds won't even check the suitability of the binding death agreement until a claim is made on the super fund, by which point it's obviously too late.
Although the superannuation regime is subject to a sole purpose test (which is to support people in retirement and their dependents), many would argue that after death people should be entitled to direct their hard-earned superannuation balances as they wish, and not be subjected to restrictions on the potential beneficiaries who may be eligible to receive the balance of funds after death.
Leaving your super to charity
Whilst it's a generous idea, under Australia's current regulations, you are not allowed to add a charity as a beneficiary in your superannuation death nomination. There are a number of charities who are currently lobbying the federal government to change this legislation through the Productivity Commission process currently going through parliament, allowing Australian Deductible Gift Recipients (DGR) charities to be named in superannuation death nominations. If accepted, this proposal would enable Australian DGR charities to receive superannuation death benefits subject to a valid nomination.
As it stands, charities are not eligible to receive death benefits directly from a superannuation fund, as a charity will not meet the criterion of eligible dependants. The only method of effective charitable giving from superannuation would be to direct the death benefits to an estate and include a gift in the Will. However, most superannuation death benefits passing into your estate are likely to be subject to a 15% tax, even if the ultimate beneficiary is a tax-deductible gift recipient charity.
This position is to be contrasted with donations made while you're still alive, which are tax deductible. However, the proposed change would enable would-be donors to direct their super to a charitable organisation - by quoting the ABN and potentially linking it to the Australian Charities and Not-for-profits Commission (ACNC), enabling the fund to receive the money without the tax burden.
Recently, the Law Council of Australia (LCA) submitted a recommendation to the Treasurer for reforming the superannuation death benefit framework. The recommendations proposed aims to eliminate limitations on who can benefit from death benefits and if approved, this reform would allow charities to be included as beneficiaries of superannuation benefits.
Get your facts straight
The reality is, when it comes to superannuation rules, things can get confusing - fast. If at any time you are considering changes to your superannuation beneficiaries, you should not do so before seeking our advice. Whilst we do understand that some people will consider seeking advice unnecessary, it has been our experience that they have not clearly understood the parameters or the implications of giving through superannuation.
The same advice applies if you're attempting to add a charity as a beneficiary of your estate. Before you do so, contact us and together we may want to first speak to the gifts in Wills team of the charity you wish to support. Over the years we have built up considerable experience and gained valuable insights into how to maximise your gift's impact, such as how to minimise the immediate implications of capital gains tax on some estate assets.
At the end of the day, for so many people planning for the future is not only about supporting themselves, but also leaving a legacy for the people they love and the purposes they are passionate about. As the age-old saying goes "A society grows great when old men plant trees in whose shade they know they shall never sit."
