(03) 9020 2905PORTFOLIO 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, one of my dreams. And I know there’s not a huge likelihood of me being able to pull off my finances that perfectly. Even less likely my death. Probably around one in a billion. It’s more likely that I’ll die either after it has run out, or I’ll die with some of it still in the fund.
As will you.
So, what happens if you die with money in your super fund? Perhaps, if it’s a small sum of money, then it might not matter too much.
But what happens if it’s not a small sum of money? What happens if you die around your super’s peak on either side of “retirement”. Or, potentially, earlier when you have substantial sums of insurance in your fund?
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.
Let me start by stating what regular readers should know: I am not an estate planning lawyer. I am a financial adviser. And while I would like to think I’m a fairly knowledgeable financial adviser, nothing you read in today’s column is a substitute for proper estate planning advice, which can, and arguably should, take in the services of solicitors, financial advisers and accountants and cover not just your super but your entire base of assets.
Estate planning can be horrendously complex, particularly where SMSFs, other trusts and business entities are involved.
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 (as legislation now 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 wife/husband, de-facto, ex-wife/husband, 15 children, step-children, lover, etc).
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 some of the action will usually need to prove some financial dependence.
Where this has increasingly becoming an issue is when there are others who believe they might have a claim on your super. This could include ex-spouses, who believe they are entitled to a portion of your super, or children from previous relationships, or step-children. Or excuse the lack of subtlety, but increasingly taken into account by the courts, the bit of crumpet/beefcake on the side.
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 (BDBNs)
Since 1999, it has been possible to make binding nominations in regards to your super.
Binding nominations 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.
BDBNs 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 around 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 that 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 wife 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 wife 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 that 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 a SMSF. His four other 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!
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Next week, breaking super news permitting, we’ll continue the theme.
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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.