Who'll get your super?

PORTFOLIO POINT: Who will get the proceeds of your super when you fall off your perch? There are some big traps. Here’s what you need to know.

The aim of super is roughly this: Get enough of a pot of assets to last you through a long life and happy retirement. And the ultimate? To spend your last penny (on a daiquiri) just moments before your heart stops (by the pool in a spectacular resort).

Okay, maybe that’s just one of my dreams. And I know there’s not a huge likelihood of me being able to arrange my lifespan and my finances so precisely that they both expire at the same time.

Eureka Report has spent a lot of time over the years talking about investors running out of super during their retirement. Today I want to talk about the opposite scenario: what happens if you die with money left in your super fund.

If it’s a small sum, it might not matter too much. But what happens if it’s more substantial – if you die around your super’s peak on either side of “retirement”. Or perhaps earlier, when your fund has a big insurance figure?

How do you leave your money in super? Who can you leave it to? Are there any tax implications? Are there broader estate planning implications? And where are the avoidable mistakes?

Today we’ll look at a few of the basics around super and estate planning today.

First, I am not an estate planning lawyer, I am a financial adviser, so nothing you read in today’s column is a substitute for proper estate planning advice. That can – and arguably should – take in the services of solicitors, financial advisers and accountants and go beyond your super to your entire base of assets.

Estate planning can be horrendously complex, particularly where SMSFs, other trusts and business entities are involved. But today, we’ll stick to the basics of superannuation and how that fits into estate planning.

Death and super

In superannuation, death is largely a cashing event. At the time that you fall off your perch, your superannuation fund will largely need to be liquidated and paid out ... somewhere, or to somebody. (There is the possibility of reversionary pensions under some circumstances and with some super funds, but that’s not a topic for today.)

Your super fund is not actually governed by your will; that is, you can’t say in your will that you leave your super to so-and-so. Who you leave your super to must largely be done through your super – although you can leave your super to your “personal legal representative”, which will mean it moves to your estate.

But even if you expressly state who you want your super to go to, it doesn’t necessarily mean your wishes will be carried out.

Non-binding death benefit nominations

Until 1999, the only option within super was to make a “non-binding” nomination for your superannuation benefits.

Non-binding nominations mean that you inform the trustees of your super fund who you would like your super paid out to. The most common example would be that you would like 100% paid out to your spouse/partner (legislation allows for same-sex couples to be considered in the equation).

Other options might include leaving 50% to your spouse and 25% each to your two children or any other combination between your nearest and dearest.

But, with non-binding nominations, the trustees then have absolute discretion as to who the money is actually paid out to. They may pay regard to your wishes, but their discretion is wide. Who they actually pay it out to is up to them, though those seeking a piece of the action will usually need to prove some financial dependence.

Where this is increasingly becoming an issue is when there are others who believe they might have a claim on your super, such as ex-spouses, children from previous relationships or step-children.

More recently the courts have seen a surge of mistresses and toy boys coming out of the woodwork to challenge non-binding nominations to the point where almost one third of all complaints handled by the Superannuation Complains Tribunal are dealing with the distribution of death benefits.

You might have specifically wanted to exclude certain people from your super payout. But when the death benefit nomination for your super fund is non-binding, the trustees of the fund have the final say. And they are within their legal right to say that so-and-so had a legitimate financial dependence on you and, as a result, they are entitled to a portion of your super.

Binding death benefit nominations

Since 1999, it has been possible to make binding nominations in regards to your super. These are designed to take away the right of the super fund trustees to exercise their discretion. If you have a spouse or partner that you wish to leave your super to, then you can, if your super fund allows for it, make a binding death benefit nomination to leave your super to a particular dependant.

Binding death benefit nominations are, in some cases, being challenged in courts, but that’s most likely where there is some belief that the nomination itself was not binding.

Binding nominations: The big issue

Not all super funds offer “binding” nomination options within their super funds. Even though the laws have been in force for about 12 years, many managed-fund super funds simply do not offer binding death benefit nominations as part of their service.

Given the time that’s elapsed, I find this incredible, to be honest. (My experience is that it’s most often industry, corporate and government funds that are lagging, but that’s not to say that there aren’t plenty of older-style retail funds that aren’t up to date either.)

However, there can be the equivalent problem with SMSFs. If your SMSF trust deed was written before, or soon after 1999 it is quite possible it does not offer an option within the trust deed for binding nominations.

With SMSFs this can be a double-edged sword. As you and your partner are likely to be the trustees, if the other person dies, then the “trustee discretion” could be used to pay out to yourself.

If for example your partner has died, as the surviving trustee you could exercise your discretion to pay yourself as the financial dependent husband (and vice versa). However, many SMSFs also have other family members (particularly the kids) as trustees. If the other trustees decide it should be paid out to them, you’ve got potential trouble on your hands with a non-binding nomination.

One horrific example I have read involves a son who was a member/trustee of an SMSF. His four siblings were not members of the fund. When the parents died, the son, who was now the sole trustee of the fund, was able to exercise complete discretion as to who the benefits were paid out to, which was a particular problem because the nominations were not “binding”. Sadly, he’d also recently developed a taste for the “good life”. His siblings got nothing. But he lived it up!

• Next week: Breaking super news permitting, we’ll continue the theme.

The ATO has outlined its compliance focus for 2011-12 for SMSF trustees. It will include a crackdown on SMSFs illegally providing early release of funds, related-party investments that contravene the 5% in-house asset limit, excess contributions along with exempt current pension income and non-arms length income. SMSF trustees are reminded that the rules on collectibles have changed, including adding hard liquor and banknotes to the list of allowable investments. Collectibles now must be insured within seven days of being acquired. In addition, there is a total restriction on funds releasing them to a related party or storing them in the private residence of someone related to a member. SMSFs that do not comply are punishable by a $1100 fine for each of the trustees. 100% tax deductions for Total Permanent Disability (TPD) Insurance are no longer a given from in the new financial year following the ATO’s 2010 draft ruling (TR 2010/D9), which states that only the parts of the premium that strictly meet the ATO’s definition of a “superannuation disability pension” will be eligible. Policies that provide a broader range of benefits will only be partially deductible and an actuarial certificate will be required to determine which portion.

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 advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.