What happens to my super when I die?

Contrary to popular belief, Superannuation does not automatically go to your estate when you die. Instead the trustee (the person in charge of your super) determines what happens with your Super. For those of you with a third party super fund, this is a board of people who are elected to act in your best interests, however if you have a SMSF, this is you + the other members of your Fund.

The Trustee needs to 1st determine who your beneficiaries are. They can include: Spouse, ex-spouse, children (including adult children), step children, or other people financially dependent on you. If you die with no nomination, it is the Trustees job to locate the dependents and pay your super to one or all of them. This may not be what you want.

How do I ensure my wishes are followed?

Put simply, ensure you have a valid binding death nomination or death benefit agreement in place. This means the Trustees have to do exactly what you have indicated.

If you want to make this process as seamless and easy as possible & to make sure it ends up where you want it to, there are several ways to do this:

Make a nomination to your Fund Binding. A 'binding' nomination is just that - it's binding on the Trustee and they must comply with your wishes. To make sure that this is binding it must be renewed every three years. A binding nomination that is greater than 3 years old becomes a non-binding agreement, meaning the Trustee can decide not to follow your wishes. Consider a death benefit agreement. A Death benefit agreement is a document you sign that removes the 3 year limit on binding nominations and makes the agreement forever lasting. This has the same effect on the Trustee in that the super must be paid in accordance with the agreement. Note not all SMSF offer this (SMSFs set up by Growthwise do)

What happens if I haven’t instructed the Trustees where my Super benefits should be paid?

The Trustee gets to decide who your Super should be paid to.

How much is my super worth when I die?

One mistake a lot of people make when preparing a death nomination/agreement is what makes up your super balance on death. In short it’s your member balance (ie your share of the SMSF assets) + any life insurance you have.

If your SMSF member balance was $500,000 and you have $500,000 worth of life insurance the death benefit payable would be $1,000,000. That’s a lot of money to consider for your beneficiary.

Can I nominate anyone?

You can only nominate the following people to receive your super balance:

• Your spouse
• Your children
• Anyone who is financially dependant on you when you die
• Someone you were financially dependant on when you die
• Your estate

Is there tax payable on my death?

Unfortunately in a lot of cases there is tax to pay when a member of a SMSF dies.

If you are over 60 and are the beneficiary of a death benefit AND a dependant for tax purposes then you pay no tax. This isn’t the case for untaxed benefits such as life insurance. You would need to pay your marginal tax rate less a 10% tax offset on these untaxed amounts. The same applies if the deceased was over 60, even if you (the beneficiary) are under 60.

If both yourself (the beneficiary) and the deceased were under 60 then you pay tax on the death benefit at your marginal rate less a 15% offset for the taxable component and your marginal rate for the untaxed component.

Notes : taxed components are income and contributions you have already paid tax on in your fund. Untaxed components would include insurance.

If you are a non tax dependant - ie an adult child these rates are different (just to be confusing!). The taxable component is taxed at 17% or your marginal rate (whichever is lower) and the untaxed at either 32% or your marginal rate (whichever is lower).

Another issue is the fact your pension reverts back to an accumulation account if you haven’t nominated a reversionary beneficiary. That means any income you earn on your member balance now becomes taxable. That also means any assets you sell to pay out the death benefit will also now incur Capital Gains Tax.

How can my super benefit be paid?

There are two ways your super benefit can be paid : a lump sum or a pension.

The simplest way to pay the super benefit per your binding nomination is as a lump sum. In practical terms this means assets of the fund need to be liquidated (if not already) and the payment transferred from the SMSF bank account to the beneficiary(s).

The alternative is to create a reversionary pension (for accounts in pension mode). For people who are already taking a pension, consider making the pension reversionary. This simply means nominating someone who will continue to receive your pension when you die. This makes it simple and easy as the Trustee just changes the pension payment to your nominated person instead of you. These pensions can be paid to your spouse as well as children under 18 or those with a disability.

Tip

It’s really important you have a handle on your entire estate plan. There are a lot of tax considerations when thinking about what assets to leave to which of your beneficiaries. You need to ensure you look at your super assets, your personal assets and your business assets (ie your entire empire) in totality to ensure everything is exactly as you want to leave your legacy. This includes tax considerations on sale of assets and or super death benefits.

Summary

So what does all of this mean? Death and super is complicated, but if you take action, it can be straightforward for your dependents when you die. Take action and review your plan regularly and you can minimise any headaches your dependents will have when you die. You can also ensure you maximise the total benefit and ensure you really are looking after your legacy.