Avoiding super estate problems

The perfect plan for your superannuation would see it last you until the day you die.

But what happens if you pass away first? If you die and there's superannuation still left, who is going to get it?

Some might flippantly suggest they don't care, because they're dead. But the vast majority of us will care.

There might well be a significant accumulation of savings in your fund. For others, there might not be a huge wad of savings, but there might be a rather large insurance policy.

In either case – and also in those cases where the amounts are relatively small – we will have very strong ideas of who we want the money to go to.

But it's scary how few people take an interest in how their super will be divvied up after they die. It's staggeringly less than the already disappointingly low number of people who care enough about their super to engage with it.

The first thing to understand is that you don't own your super. It is owned by the trustee of your fund. Obviously, with SMSFs, the trustee and the member are often one and the same and share identical interests. (But this is far from always the case and I will return to where problems can arise here.)

If you are in an APRA fund (all super funds other than SMSFs), your super fund will have a trustee, or many trustees. Historically, it is those trustees who ultimately decide what happens with your super after your death.

The way that you get a say over your funds in the event of your death is through what is known as “nominations”. That is, you can nominate who you want to receive your “death benefit” in the event of your demise.

However, it depends on the type of nomination that you can make with your fund, and who you want to make it to, as to whether that person will actually get it.

The actual laws surrounding nominations are far more complex than what I will go into today. However, there are three different types of nomination.

1. No nomination. Where the member has not nominated anyone to receive their super fund balance.
2. A non-binding nomination. Where the member nominates who they would like to receive their “death benefit nomination” (DBN). However, as it is non-binding, the ultimate say on who it goes to will belong to the trustee/s of the fund. The trustees have discretion as to who they pay it to.
3. A binding death benefit nomination (BDBN). A legal BDBN takes away the discretion of the trustee to pay it out to whoever they want.

It is also important to understand that trustees may only allow member entitlements to be paid out to (a) legal personal representatives (usually the executor of the person's estate), or (b) a “dependant”, defined as a spouse, child of any age, or another person in an interdependent relationship with the member.

No nomination

If a super fund member does not nominate a beneficiary, then the trustee of the fund determines who will receive the super monies (plus, potentially, any insurance in the fund).

This may be a dependant, or the legal personal representative.

Non-binding nomination

This is where a member has made a nomination for the death benefit. Under a non-binding nomination, the trustees of the fund are not bound by the nomination. In practice, they will generally pay it out to the nominated person, so long as they are eligible to receive the benefit as a legal personal representative or dependant.

However, where they are neither of those (for example, parents who are not interdependent, or siblings), the trustee's discretion can come into play and they will often seek out those who do fit a category that can be paid a super death benefit.

Binding death benefit nomination (BDBN)

Where a legal BDBN is made, the trustees have no discretion. What makes it legal? That it has been made to a legal personal representative or dependant under the Superannuation Industry Supervision (SIS) Act.

The big issues to consider

If you had your choice, most people would always choose a BDBN. Why leave the decision in the hands of someone you have never met and won't necessarily follow your wishes?

The only major sticking point with them is that it generally needs to be renewed every three years (although some funds are offering non-lapsing BDBNs).

However, funds are not required to offer BDBNs and not all funds offer this as an option, including SMSFs. Older SMSF trust deeds might pre-date these rules being allowed also and it might require an update of your trust deed.

And it can go horribly wrong in a SMSF. Unless you, as Member A, intend to leave it solely the only remaining member, your partner, who is Member B, and there are no other members of the fund, then the door is open for there to be issues. If there are other members/trustees of the fund, they might also have some control over where the death benefits go. And if you speak to lawyers in this area, they will assure you of how incredibly greedy some people get when it comes to fighting over what's left when someone dies.

Most APRA funds operate under trust deeds that have been around for some time and the expense of changing the trust deed and the option for members is often very expensive. Many have left it in the too-hard basket and only offer non-binding nominations still.

Some public sector super funds don't even offer non-binding nominations, using their trust rules to allow trustees the ultimate power to determine who receives the super money. (This power would be rarely misused, or the courts would be literally filled with people challenging super death benefit payouts.)

What do you do?

It starts with investigation of your existing fund, or funds. What options do they allow? Who have you nominated? Are they legally entitled to receive a death benefit? Will they be taxed?

If you discover your fund does not offer the ability to do what it is that you want to achieve on your death, then in most cases, you will need to change super funds. If your SMSF trust deed won't accommodate what you're wanting to achieve, you can probably, more simply, update the trust deed.

This is serious. You need to look into it. Many of you will be highly surprised with what your super fund, or SMSF trust deed, does, or doesn't, allow.

Whether you have a small or large balance (or potential balance if you have some insurance inside super), then leaving this for trustees to determine, or family members to fight over, might make you turn in your grave.

If you don't know what you're doing, or the options aren't what you want, seek the advice of a qualified financial adviser.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Bruce Brammall Financial and the author of Debt Man Walking. E: bruce@brucebrammallfinancial.com.au

• The federal government should change the work test rule to make it more easily understood, according to a submission from the SMSF Professionals' Association of Australia technical director Graeme Colley.

The work test rule should be changed to apply from July 1 after a member turns 65, rather than from a member's 65th birthday, the submission says.

“We think it would be a lot easier to understand if the rule stated that if a member was 65 on July 1 then the work test will apply,” Colley told The Australian Financial Review.

• Most SMSF practitioners expect the federal government will reject the Financial System Inquiry's call to ban limited recourse borrowing arrangements, according to a poll published in media reports.

The poll of 135 practitioners found 61.5% of respondents expect the government to reject the recommendation, while 38.5% expect the recommendation to be adopted.