Who benefits when you're gone?
For most people, their superannuation is likely to be the second-biggest asset after their house. But while the house will usually be included in the will and estate, super benefits stand outside the estate.
For most people, their superannuation is likely to be the second-biggest asset after their house. But while the house will usually be included in the will and estate, super benefits stand outside the estate.That means extra care needs to be taken to ensure death benefits go to the right people in accordance with your wishes.The super fund cannot pay the death benefit to the pet corgi or a favourite charity it can only go to someone defined as a "dependant" of the deceased fund member.Fund members would be surprised at just how much discretion the trustees of super funds have in deciding who gets what.With more blended families and with death-benefit payouts worth more, disputes over the distribution of money are increasing. And unless fund members come to grips with how their fund treats death benefits, the chances of a dispute will be higher.The terminology is mind-boggling, but broadly speaking, the term "dependant" - as defined under the super rules - includes a spouse, children (including adult children) and people with whom the fund member has an "interdependent" relationship, and those who depend on the fund member financially.The purpose of super is to help those who had an expectation of ongoing financial support from the fund member had they not died.That's the guiding principle used by trustees in determining who gets what. The Superannuation Complaints Tribunal provides real case studies that are representative of the sorts of complaints being made. These case studies show disputes over death benefits are often between the spouse of the deceased and his or her adult children.The tribunal could not readily supply Weekend Money with a breakdown of who is making the complaints, "but it is quite possible that we do receive a lot of complaints from adult children who are disputing the trustees' decision to pay to the second spouse or second relationship", a senior manager, complaints resolution, at the tribunal, Fiona Power, says.The death benefit consists of the deceased member's account balance and the value of the life insurance. Not only are super fund account balances continuing to recover after the global financial crisis, funds are providing more life insurance to members. The range for "default" insurance (provided at no direct cost to members) typically peaks at between $150,000 and $250,000, when the member reaches 35 or 40, with the cover dropping as members age. In many cases, the value of the insurance can be worth more than the super account.Blended familiesMaking a "preferred" nomination with the super fund will help ensure that the benefits go to the right person or people. With a preferred (sometimes called "non-binding") nomination, the fund's trustees will take account of the member's wishes but are not bound by them.Even when a member makes a preferred nomination, the trustees still retain a lot of discretion about who gets paid what.What usually happens with a preferred nomination is that the trustees will identify all of the people who are eligible to receive all or part of the death benefit because they fall within the definition of "dependant" in the fund's trust deed and law.Power says the second step is deciding what proportion of the benefit each potential beneficiary should receive. The trustees will take into consideration the wishes of the deceased member where a preferred nomination was made or be guided by the terms of the will.If there are competing dependants, the trustees will take into account the financial needs and circumstances of the potential beneficiaries and the nature of the relationship.Binding nominationsWith a "binding nomination", the fund has to pay the death benefit in accordance with the member's wishes, but the beneficiaries still have to fall within the definition of "dependency".Under both preferred and binding nominations, a fund member can nominate a legal representative as the beneficiary.They may do so because they have no dependants as defined under the super rules (perhaps a young fund member) or want to have the death benefit paid under the terms of the will.If no nomination is made and no dependants identified, the trustees may pay the death benefit to the legal representative.Fund members are free to have the death benefit paid through the will to, say, a charity. But that would likely be successfully challenged by a dependant of the deceased.Most super funds offer both types of nominations, though the fund member does not have to make a nomination.The research manager at SuperRatings, Kirby Rappell, says 71 per cent of not-for-profit funds (which include industry, corporate and government funds) and 94 per cent of retail funds offer binding nominations.Disputes are more likely to occur among the dependants of deceased fund members who have not nominated recipients or who have made a preferred, rather than a binding, nomination, Power says.Unless there is a binding nomination naming the adult children as beneficiaries, the trustees are more likely to favour the spouse in any dispute with the member's adult children.While adult children who are financially independent are still regarded as dependants under super rules, they may have to pay tax on the benefit.Binding nominations are usually only valid for three years and unless renewed, will lapse. The signature of the fund member has to be witnessed.DIY GIVES FLEXIBILITYTrustees of self-managed super funds have much more flexibility in the payment of death benefits than members of large super funds.With a self-managed super fund, the death benefit can be tailored for individual circumstances.For example, trustees of self-managed super funds can have the death benefit paid as an income stream to a dependant.The head of technical services at self-managed superannuation funds administrator Multiport, Philip la Greca, says many want to do that, perhaps for a child with a drug problem or to pay for the education of a dependent child.Trustees may also provide for a certain amount of the death benefit to go to their spouse, with half the remainder going to each of two children.Death benefits can even be distributed asset by asset for example, if the fund has business property that could be passed to the child who is continuing the family business, la Greca says. Members of large super funds, by contrast, are generally limited to naming the beneficiaries and dividing the death benefit (with percentages) among the beneficiaries.Large funds usually pay death benefits as a lump sum rather than a pension income stream because it is simpler in administration terms for the fund, la Greca says.