Understanding Superannuation and Estate Planning: What Happens to Your Superannuation When You Pass Away?
At our advisory firm, we often receive two crucial questions from our clients regarding superannuation:
- How is my superannuation dealt with following my death?
- Who can receive my superannuation when I die?
Superannuation, Wills, and Deceased Estates Surprisingly, your Will does not automatically dictate who receives your superannuation benefits after your passing. In Australia, the superannuation system is governed by two key pieces of legislation: the Superannuation Industry (Supervision) Act 1993 (Cth) (Act), and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (Regulations). These Regulations outline the essential provisions for the compulsory distribution of superannuation upon the death of a member of a superannuation fund. This means that the fund pays out the deceased member's superannuation benefits.
Understanding Superannuation Death Benefits A person's superannuation member benefits consist of their member contributions, including compulsory contributions from their employer, and any voluntary contributions they make, such as salary sacrifice amounts. Additionally, a member's benefits may include insurance benefits, like a life insurance policy held within their superannuation fund. After the death of a superannuation member, their 'superannuation death benefit' may include member contributions and insurance benefits paid into the fund by an insurer under an insurance policy.
When Must the Superannuation Death Benefit Be Paid? According to the Regulations, a superannuation fund member's interest cannot remain in the fund indefinitely after their death. It must be paid out to a beneficiary as soon as practicable. Generally, this means within six months from the date of the member's death. If the death benefit is to be paid to the deceased member's estate, the timeframe is six months from the granting of Probate of the deceased member's Will. However, the specific circumstances of a person's death and the nature of their estate and personal affairs can influence what is considered "as soon as practicable."
Who Can Receive a Deceased Person's Superannuation Death Benefit? While an individual can designate any person or entity as a beneficiary in their Will, superannuation legislation restricts the categories of eligible recipients for a superannuation death benefit. The trustee of a superannuation fund can pay a deceased member's death benefit to either their 'legal personal representative' or to 'dependants' of the deceased member.
Defining 'Legal Personal Representative' The Act defines a 'legal personal representative' as either the executor of the deceased person's Will or the administrator of their estate. The term 'administrator' covers various scenarios, including situations where the deceased person did not leave a valid Will, or the appointed executors are unable or unwilling to administer the estate. In such cases, the Court of an Australian state or territory appoints a person with a significant interest in the estate as the administrator.
If the Superannuation Death Benefit Goes to the Legal Personal Representative If the legal personal representative of a deceased fund member receives a superannuation death benefit, it becomes part of the deceased person's estate. It will be distributed according to the terms of the member's Will, or if there is no valid Will, according to the laws of intestacy in the state or territory where they were domiciled. Depending on the components of the death benefit and the status of the ultimate beneficiary, the legal personal representative may need to pay death benefits tax on the receipt of the death benefit. Generally, death benefits paid to a financial dependent of the deceased member will be tax-free.
Conclusion Superannuation plays a crucial role in the asset mix of most Australians, but it is often overlooked when considering estate planning objectives. It is vital to remember that superannuation law, along with applicable taxation legislation, is complex and technical. Seeking specialist advice is essential to ensure that your superannuation benefits are distributed according to your wishes and in the most tax-efficient manner possible. At our accounting and advisory business, we are here to provide the expertise you need to navigate the intricacies of superannuation and estate planning, so you can secure a bright future for your loved ones.