(03) 9020 2905PORTFOLIO POINT: You’ve fallen off your perch. Who’s getting your super? Part two of my series on death benefit nominations.
At the time of retirement, superannuation is likely to be the second largest asset of most people, suggest the statistics.
The home is likely to be your biggest asset, unless you’ve developed a reasonable asset base outside super (as Eureka Report readers might well have) in the form of a business or investment assets.
As we discussed in Part One of this piece (6/7/11), your Will deals with your non-super assets. However, your super needs to be dealt with within super.
Leaving it to financial dependants
Under superannuation law, you can only leave your superannuation to financial dependants, or your “legal personal representative”.
Financial dependants, according to superannuation legislation, are generally going to be your spouse/partner (even if the dependant earns $1 million a year), or children who are financially dependent on you. That is, older children who have left the nest are unlikely to be considered financial dependants.
But it’s a grey area. One of your children might be older than 18, but is still dependent on you, because they are a full-time student and you are fully providing for them. Your parent (or parent-in-law) might be living with you and they might also be considered a financial dependant. Others can also be considered financially dependent on you under superannuation legislation, such as an ex-spouse or step-children.
Tax-free super payouts
Superannuation sums left to people who qualify as dependants under superannuation legislation come out to the dependant tax-free.
Most often, members will be leaving their super to their spouse (except, obviously, if they’re pre-deceased you and you haven’t entered into another relationship. See further down), in which case there’s no issue. No matter how big the size of the pot, it will come out tax free.
Similarly, if you’ve left the world without managing to see your children through to adulthood (18, even if the statistics show fewer 18-year-olds are capable of being financially independent than they used to), then they would likely be able to receive the proceeds of your super fund tax free also.
(There is also the possibility, with some super funds, of paying reversionary pensions to the spouse or dependent children, but that’s a topic for another day.)
Where this can get tricky is the definition of a child, for superannuation dependency purposes. Children under the age of 18 will be considered dependants. However, those 18 and over and less than 25, can be considered dependants if it can be proven they are financially dependent on the member.
Children who are older than that but suffer from certain disabilities, can also be considered financial dependants.
But the complications don’t end there. There can be others who can claim they were financially dependent on you, including, for instance, former partners to whom you are paying maintenance and relatives (parents, or parents-in-law) who you are supporting.
Tax of death benefits to non-dependants
The taxation of benefits to non-dependents is complicated and depends on the breakdown of the lump sum.
For a full listing of the tax implications, click here to visit the ATO’s website.
But in brief:
- The tax-free component (such as non-concessional contributions) is still tax-free.
- The taxable component has two potential tax rates:
- The taxed element is taxed at 15% (plus the Medicare levy)
- The untaxed element is taxed at 30% (plus Medicare levy)
Big insurance sums in super
At the start of your working life, your super will be minimal.
However, as your super begins to grow in your late 30s, 40s and 50s, it’s quite possible (in fact, recommended) that the insurance in your super fund will dwarf your actual accumulation fund balance, to make sure your family is looked after in the event of your death.
Life insurance is a tax deduction to the super fund (but not in your personal name), so is often worthwhile having in super.
Insurance can also be taxed differently inside super. If you’re leaving it to dependants, then there’s no tax consequences. However, if left to non-dependants then it will probably be deemed taxable untaxed in the fund and 31.5% could go to the ATO.
Super death benefit strategies
The potential tax-free nature of superannuation death benefit payouts means that it needs to be an integral part of your estate planning.
If you have, for instance, $1 million in super and $1 million outside super at the time of your death, then how you deliver that money to those you want it delivered to can become very important.
If you had many parties you wanted to leave money to, you would, generally, leave the super to dependants and your non-super to non-dependants.
Renewing binding nominations
A final note relating to my column last week in regards to binding nominations.
Most binding nominations need to be renewed every three years, or they become non-binding and subject to non-binding rules.
With managed-fund superannuation, you will generally be sent a form to renew your nomination just short of the three-year mark. For SMSFs, you’ll need to read your trust deed to determine how you renew your binding nomination.
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Nothing you read in today’s column is a substitute for proper estate planning advice, which should take in the services of solicitors, financial advisers and accountants and cover not just your super but your entire base of assets.
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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.