Estate planning is complicated! From experience, most people are unaware that their superannuation does not form part of their estate and therefore is not covered by your Will. Your super needs to be addressed separately and is normally done so with the nomination of beneficiaries.
So what happens if you die without nominating a beneficiary? The trustee decides on where the money should be directed and is obligated to act in your best interests. This seems to make sense and, in many cases, ends up with a satisfactory result; however, the trustee’s decision is by no means guaranteed to match your wishes.
The real problem is that tax treatment is different for those deemed to be dependants and non-dependants. The Superannuation Act has a specific definition for who is a dependant and is quite limited in nature, for instance, adult children aren’t usually considered dependants.
A superannuation death benefit paid to a dependant is tax-free, whereas non-dependants are taxed at either 15 or 30 per cent (depending on whether the funds have been taxed previously).
It is not uncommon for the trustee to decide that a non-dependant (usually an adult child) should receive a portion of the super which then results in taxation that would otherwise not occur.
The best way to make sure that your super is distributed how you wish is to nominate a beneficiary. There are two types, binding and non-binding.
A non-binding nomination provides the trustee a guide to your wishes, however, they are not bound by them and it is still possible that they will distribute your super differently to your nomination.
A binding nomination is, as the name suggests, legally binding. The trustee is obligated to distribute as per the nomination.
A binding nomination needs to be verified by two witnesses and traditionally they are required to be updated every three years. Recently, non-lapsing binding nominations have become available; these do not need to be updated.
If you would like your superannuation to form part of your estate and be covered by your Will, it is possible to do so by nominating your legal personal representative as your beneficiary. This is only effective if it is a binding nomination.
This strategy can be beneficial as it gives the executor of the estate flexibility in distributing the assets with a view to the estate as a whole.
A simple example would be if you have three kids and you wish them to receive an equal share of your estate. If one of your children is a dependant according to the Superannuation Act and the others aren’t, it would be preferable that the super went to the dependant who would not incur taxation. The other children could, in turn, receive a higher portion of the remaining assets. They would all receive an equal share, but the estate would pay less tax than if the super was split equally amongst the children.
My advice would be, check with your super fund to see if you have nominated a beneficiary and speak to your advisor about your options.