When it comes to estate planning, many people overlook their superannuation. This is risky, because superannuation does not necessarily form part of your estate. This means that your ‘regular’ legal will may not address what happens to your super when you no longer need it.
The reason for this is that benefits held in super are not legally owned by the super member. Legally, the assets in the fund are owned by the trustees of the fund. These trustees need to manage and apply these assets for the benefit of their members – but the members do not legally own the assets. As a result, trustees are not necessarily bound to follow a member’s legal will.
Trustees of the fund must actually exercise discretion when deciding how to distribute benefits after a member dies. Usually, that discretion is exercised in the same way that the member would want. For example, a member may wish for all of his or her benefits to be paid to a surviving spouse – something that trustees would normally be expected to make happen.
That said, problems can arise. Trustees can exercise their discretion in a way that the member may not have wanted. This can be particularly the case if there are multiple relationships, competitive children, et cetera.
When exercising their discretion as to how to distribute benefits, trustees of a super fund will look at factors such as the following:
- the relationship between a potential recipient and the deceased member;
- a potential recipient’s age and ability to look after themselves financially;
- the extent of the potential recipient’s dependency on the deceased;
- the potential recipient’s personal financial circumstances;
- the history of the relationship between the potential recipient and the deceased member; and
- the strength of any other claims made by other potential recipients.
In addition, trustees can only pay benefits to specific people. Those people must qualify as a ‘superannuation dependent’ of the deceased member. The categories of superannuation dependent include:
- a spouse,
- a child (of any age); or
- a person who was financially dependent on the member at the time of death; or
- the estate of the deceased member.
Binding death benefit nominations
Members can dictate how the trustee exercises their discretion by signing what is known as a ‘binding death benefit nomination’ (BDBN).
A BDBN directs the trustee to pay death benefits to a particular person or persons. This lets the member control the trustees’ discretion as to who receives the benefits on the client’s death. Trustees must pay death benefits in accordance with the BDBN.
A BDBN may be used in conjunction with a so called “super will” to coordinate the payment of the deceased member’s super benefits with their other estate planning strategies.
A BDBN usually cannot be contested by an aggrieved person unless for some reason it is not valid. Whether a BDBN is valid is a legal question. Possible reasons for a BDBN not being valid include:
- the fund’s trust deed does not allow BDBNs;
- the BDBN was not signed properly;
- the client was not of sound mind when the BDBN was executed;
- the BDBN is the result of a fraud or emotional or physical duress; and
- the BDBN is more than three years old.
Special issues for self-managed super funds
When a member of an SMSF dies, ongoing control of the fund is held by any remaining individual trustees or the shareholders/directors of a corporate trustee.
A common problem can arise where a member has several adult children, but only one of those children is a member and trustee of the SMSF. That child controls the SMSF on the death of the member/s and has the potential to exercise their discretion in ways that compromise their brothers and sisters. As you can imagine, tact and diplomacy is often vital here – as well as a member being very careful about which of their adult children they select two act as co-trustee. In times gone by, the number of members of a self-managed super fund was limited to 4. That limit has been extended to 6 – in no small part to overcome the problem of only some family members having access to and responsibility for what are essentially family assets.
If you would like to know more about how best to manage your super benefits after you die, please do not hesitate to contact us. We will be only too happy to assist you to get this critical decision absolutely correct.