23 November 2009
The myths about superannuation death benefit planning - Part 1
What will happen to your superannuation death benefit when you die? From our experience, many clients are under the impression that their superannuation benefit is “being taken care of” because of various “myths”. As a result, many clients have not effectively planned for their superannuation benefit in the event of their death, leading to the clients’ wishes not being followed. We set out below some of the common myths that we encounter in our practice.
The case of Mr Too-Young
Mr Too-Young has only recently entered into the workforce. Mr Too-Young, like many of his “too-young” peers, is not married but he is in a relationship. He lives with his parents, trying to save some money to buy his own place. Occasionally, he stayed over at his girlfriend’s rented place. Since working, he frequently contributes towards the parents’ household and mortgage expenditure. At the same time, as the frequency of his overnight stay at his girlfriend’s place increases, he also makes some contributions towards the rental payment of that place.
Mr Too-Young thought that he has very little accumulated in his superannuation fund – afterall, he has only joined the workforce for a short period of time and he does not have any spare cash to make extra contributions into his superannuation fund. He would like his parents to receive his superannuation benefit and he thinks that this is likely to be the case as he is not married, has no children and his parents are his immediate family.
Unfortunately, Mr Too-Young met with an accident and died without planning for his superannuation death benefit. As is commonly the case, his employer’s contribution to his superannuation fund included a component for a life insurance policy on his life. On his death, the insurance proceeds were paid to his superannuation fund and forms part of Mr Too-Young’s superannuation death benefit. All of a sudden, the “not-so-valuable” superannuation death benefit becomes a significant amount of wealth worth making a claim on.
Myth #1 – Young people need not plan for their superannuation benefit since they usually have very little in their superannuation fund.
Fact – It is never too early to plan for your superannuation death benefit. Indeed, as superannuation funds enjoy certain tax benefits in taking out insurance policies on the life of its members, many funds provide a life insurance facility for members. The value of the policy proceeds on death will surely make the value of the superannuation death benefit worth planning for.
Mr Too-Young’s girlfriend wrote to the trustee of his superannuation fund claiming to be entitled to his superannuation death benefit. His parents too, claimed to have an entitlement on his superannuation fund. As Mr Too-Young did nothing to plan for the payment of his superannuation death benefit, the decision as to who and how his death benefit should be distributed now rests on the trustee of his superannuation fund. The trustee’s decision is then dependant on the merits of the case presented by his girlfriend and his parents.
Myth #2 – A member’s superannuation benefit will automatically be paid to their immediate family members – eg spouse and children or if none, then parents or siblings.
Fact - Under the superannuation law, if a member of a superannuation fund dies, there is a limited category of persons to whom the trustee of the superannuation fund may pay the member’s benefit. These are described as the member’s dependants or legal personal representative. Broadly, a member’s dependants include spouse (including de facto spouse), children and persons who are financial dependants of the member.
In the case of Mr Too-Young, his girlfriend could qualify as his defacto or financial dependant, subject to the factual circumstances of their relationship. Likewise, his parents may also be his financial dependants given his financial contribution to the household though this is ultimately determined by the merits of the case presented by both parties. Importantly, this lack of certainty meant that Mr Too-Young’s girlfriend and parents have to go through a costly legal exercise to stake their claims and the outcome may not necessarily reflect the true wishes of Mr Too-Young.
The difficulties faced by Mr Too-Young’s girlfriend and his parents could be avoided if Mr Too-Yong had taken the following action to plan for his superannuation death benefit:
Completing a valid binding death benefit nomination. A validly signed binding death benefit nomination is binding on the trustee of the superannuation fund so that the trustee must pay Mr Too-Young’s superannuation death benefit to the beneficiary nominated by him. However, a trustee of a superannuation fund will not abide with a binding death benefit nomination if the member has nominated persons who are either not a dependant of the member or not the legal personal representative of the member.
A payment of his superannuation death benefit to Mr Too-Young’s legal personal representative means that the death benefit will form part of his estate. In this case Mr Too-Young will need to execute a Will that sets out how he would like his estate (which will include his superannuation death benefit) to be distributed to his parents and/or girlfriend.
In the case of Mr Too-Young, his binding death benefit nomination may be invalid if he directly nominates his parents or his girlfriend as it is not clear from the facts if these people will qualify as his “dependants” for superannuation purposes. However, by nominating his legal personal representative as beneficiary, this allows Mr Too-Young to dictate how his superannuation benefit will be paid through his Will. It may still, however, be possible for the girlfriend or the parents to make a claim on the estate of Mr Too-Young if they have the legal standing to do so under the succession laws in the relevant jurisdiction.
It is estimated that the total value of superannuation fund’s asset in June 2009 was $1.08 trillion. This suggests that for many clients, superannuation benefit is likely to be a valuable asset and definitely worth planning for. As outlined above, taking a few simple steps such as executing a binding death benefit nomination and preparing a thoroughly considered Will will often go a long way to ensuring that a client’s superannuation death benefit is properly dealt with. However, it should be noted that, in some circumstances, even completing the steps described here may not always prove successful in achieving a client’s objectives. Indeed, in Part 2 of this Bulletin, we will look at circumstances where this is the case.
Author: Kar Na Tan