It's a legal maze, if you will
Don't leave home without a credit card, nor depart this world without a will.
A will makes life easier for your nearest and dearest, or tougher for the ex, as the case may be.
And you're never too young to die. Think Lisa Lopes, the American rapper who died in a car crash aged 30. Or Steve Irwin.
It's estimated one-third of Australians die intestate, potentially causing problems for joint assets, delaying distributions and even prompting the estate to finish up in consolidated revenue.
Dying in Victoria leaves you open to claims against your will from neighbours with whom you might have had financial dealings. In NSW, anything you've been giving away can be reeled back into your estate.
Death duties no longer exist but there's still a tax on dying when your will and super fund aren't speaking to each other. And you can bet your life, forgive the turn of phrase, that condolences won't figure prominently in the Tax Office's calculations.
Without a binding nomination - yes, there's such a thing as a non-binding one if you want the trustee to have some discretion - your super could finish up almost anywhere.
Incredibly, the trustee of your super fund, who you've probably never met, is going to have more power than you did in framing your will. Nor does a trustee have to tell you where your super money will be going if you haven't made a binding nomination. That's decided at payout time.
Prominent among complaints to the Superannuation Complaints Tribunal, which is doing record business, are from those passed over by the trustee for a new partner or younger children.
That's why will kits from the newsagent or downloaded online, or free with a funeral plan, can give a false sense of comfort - any reference to super won't count there.
Worse, the will could do the rounds of the courts at the expense of those you were trying to help.
The senior manager of estate planning at Equity Trustees, former litigation lawyer Anna Hacker, says one unsigned will in the Northern Territory cost the estate a huge amount "to go to court even though no one was arguing against it".
It's essential to update your will as your financial and personal circumstances change. The same goes for your super nomination. Binding nominations lapse after three years.
It gets worse. Even Hacker almost fell foul of the super beneficiary rules.
"I had my brother as a binding nomination but I realise now it wouldn't have worked," she says.
The reason is that, as a non-dependant, her brother would have paid 16.5 per cent tax on the payout, a death duty by stealth.
Even if the super fund was paying a pension, the Tax Office converts it to a lump sum and taxes it. Fortunately, voluntary payments - those not salary sacrificed - to super always stay tax-free, no matter who benefits.
Otherwise, only super paid to dependants - usually a spouse or minors - escapes tax.
A way around the tax on non-dependants is withdrawing a lump sum from your super just before you die, if you don't mind having your accountant by your sickbed.
Most super funds also contain life insurance, which can be worth way more than the contributions. This will be taxed at 31.5 per cent in the hands of non-dependants.
The family of a young man who died with four small super funds was astonished to learn his insurance policies were worth $800,000.
Life insurance is one of the easiest ways to ensure your estate is debt-free and distributed equitably between loved ones. Australian Unity gives an example of a businessman whose daughter wants to continue the family business but whose son wants out.
To give both the same benefit, the solution is to will the business to the daughter and increase life insurance cover to the same value, nominating the son as the beneficiary.
Wills are increasingly being challenged. In NSW, the average cost of a challenge to the estate is $100,000.
"Since the GFC there's been more pressure to challenge, especially gifts to charity," Hacker says.
The best protection is holding assets in a family trust, then technically they're not yours and so not affected by your death. Well, you know what I mean. It can solve other problems, too. An 18-year-old beneficiary of your super will get it all in one go as a lump sum, taxed at 16.5 per cent, but if you nominate your estate you can set up a trust paying an allowance instead.
You need somebody you trust as executor because a will can't entertain every contingency.
Even then, if your chosen executor dies before you, your estate may not be distributed the way you'd want, irrespective of your will.
Advisers recommend appointing a power of attorney as well.
Unless you have somebody empowered to look after your affairs before you become incapacitated, they could finish up being administered by some government department.
Frequently Asked Questions about this Article…
Yes. The article notes about one-third of Australians die intestate (without a will), which can delay distributions, create problems for joint assets and even funnel assets to consolidated revenue. A clear, up-to-date will makes it easier for loved ones and reduces the risk of costly court action.
If you don’t have a valid binding nomination, the trustee of your super fund (who you may never meet) has discretion over who gets your super at payout time. That can mean benefits go to a new partner or younger children and has prompted record complaints to the Superannuation Complaints Tribunal.
A binding nomination legally directs your super fund who should receive your benefits; a non-binding nomination merely guides the trustee, who can still decide differently. Binding nominations also lapse after three years, so you must renew them to keep them effective.
Yes. The article explains that payouts to non-dependants can attract tax — a lump-sum paid to a non-dependant can be taxed (the article cites 16.5% as an example), and life-insurance proceeds inside super paid to non-dependants may be taxed around 31.5%. By contrast, dependants such as a spouse or minors usually receive super tax-free.
The article mentions a workaround some consider: withdrawing a lump sum from super before death so it isn’t taxed as a death benefit — though it’s an extreme and timing-sensitive option. It also notes voluntary (non-salary sacrificed) contributions generally remain tax-free regardless of the beneficiary.
Yes. Many super funds include life insurance that can be substantial. The article gives an example where life cover was used to equalise an estate — passing a business to one child while increasing life cover and nominating the other child as the beneficiary so both receive comparable value.
Wills are increasingly challenged (the article notes the average cost of a challenge in NSW is about $100,000). One recommended protection is holding assets in a family trust so they’re not technically part of your personal estate. Regularly updating wills and super nominations also helps reduce disputes.
Choose an executor you trust because a will can’t cover every contingency; if your chosen executor dies before you, distributions may not follow your intentions. Advisers in the article also recommend appointing a power of attorney so someone can manage your affairs if you become incapacitated — otherwise a government department could end up administering you.
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