When you pass away, your superannuation fund trustee is obligated to pay your super to one or more of your beneficiaries. Understanding how this process works ensures your loved ones receive your super as you intended.
Why your will isn’t enough
Your will controls who receives assets in your estate – including real estate, bank accounts, shares, vehicles, furniture and other valuables. However, superannuation generally doesn’t form part of your estate because the fund trustee decides who receives it, unless you’ve made a binding death benefit nomination directing it to your estate.
If you do nothing, your super fund trustee will decide who receives your super. In most circumstances, this would be your surviving spouse, children or estate.
Who can receive your super?
Super funds can only pay your super to a restricted list of people (known as dependant beneficiaries). Dependants include:
- your spouse or de facto spouse;
- your children of any age;
- your financial dependants at the time of your death; or
- someone with whom you have an “interdependency relationship” at the time of your death.
Alternatively, you can direct the trustee to pay your super to your legal personal representative, meaning it gets paid to the executor of your estate.
If you nominate someone outside this list, your nomination will be invalid, causing significant delays and uncertainty about who receives your benefit.
Understanding the types of beneficiaries
Where you don’t have a spouse or children, you may want to nominate someone with whom you have an “interdependency relationship”. Many people attempt to nominate their parents this way, but most are unsuccessful.
An interdependency relationship only exists when:
- you have a close personal relationship with one another (demonstrated and ongoing commitment to emotional support and wellbeing);
- you live together;
- one or each of you provides financial support; and
- one or each of you provides domestic support and personal care.
Generally, all four criteria must be met, though limited exceptions exist. Many Australian Financial Complaints Authority (AFCA) cases and ATO private rulings have found that most parents do not have what would be considered an interdependency relationship with their adult children.
AFCA provides a useful fact sheet to help understand these relationships.
Financial dependence can be an equally challenging relationship to prove. The ATO provides further guidance in this area. For example, at the time of your death, the beneficiary will need to have documents that clearly show their normal living expenses were financed by payments from you, and that they couldn’t meet their normal living expenses (such as groceries and mortgage/rent) without your support.
Invalid nominations are only discovered after death, not when made, potentially causing payment delays or misdirected funds, so it’s important to seek advice on complicated relationships.
Tax implications matter
Understanding beneficiary nominations is also important for tax purposes. Payments to spouses, children under 18, financial dependants and people in interdependency relationships are tax-free. However, tax of up to 30% may be withheld on super payments to most other people, including adult children. Getting tax advice is worthwhile when documenting your estate planning wishes.
Making your nomination
To communicate your wishes, you can submit a valid “Binding death benefit nomination”, available on your fund’s website, to your super fund trustee (if you’re a member of a large APRA-regulated super fund). SMSF members should check their trust deed and consult with legal and tax advisers to ensure nominations are valid.
Getting advice
The unexpected can happen at any time. Getting legal and tax advice to properly nominate your beneficiaries will benefit those you love and ensure your super is distributed according to your wishes.
