February 2010

The myths about superannuation death benefit planning - Part 2

In our last Bulletin, we discussed some of the facts regarding superannuation death benefits:

  • Generally, the trustee of a superannuation fund has the discretion to decide who should receive a member’s death benefit and how it should be paid. This involves a 2 step approach by the trustee:
    • The trustee must firstly identify the class of beneficiaries who qualify as "dependants" (for the purposes of the superannuation laws) and identify the legal personal representative of the member; and
    • Having regard to all relevant facts and circumstances, the trustee must then determine who, amongst the identified dependants and legal personal representative, will receive the death benefit and if more than one, in what proportion and manner.
  • A validly executed binding death benefit nomination that remains effective at the time of a member’s death will remove the trustee’s discretion. That is, the trustee of the superannuation fund is bound to follow the member’s wishes and directions as noted in the death benefit nomination.

In part 2 of this Bulletin, we will look at circumstances when a binding death benefit nomination may not be "binding" on the trustee of a superannuation fund.

The case of Mr and Mrs Retiree

Mr and Mrs Retiree are both over 60 years of age and have recently retired from the workforce. They have accumulated significant wealth in their superannuation fund as well as outside the superannuation fund environment. Neither of them is financially dependant on the other. Both have adult children from their respective previous marriages but there are no children from the relationship of Mr and Mrs Retiree.

Given their financial independence, they both agree that their wealth, including their respective superannuation benefit, should pass on to their own children – not the children of the other party and not to each other. Having read the Bartier Perry Bulletin - The Myths about Superannuation Death Benefit Planning Part 1, Mr Retiree thought it was appropriate to sign a binding death benefit nomination to direct the payment of his superannuation death benefit to his estate and prepare a Will that provided for his wealth to be shared amongst his children and grandchildren. Mrs Retiree promptly did the same arrangement with the intention of passing her wealth to her children upon her death.

Not long after Mr and Mrs Retiree have put in place their superannuation death benefit arrangement and estate plan, they each begin to draw down their superannuation benefit in the form of pension payments. As is commonly done, they have nominated each other as the reversionary pensioner. Indeed, they were advised that nominating each other as the reversionary pensioner "is the practical and tax effective way to go".

(The taxation of superannuation fund pension payments is complex and will be the subject of another bulletin. Suffice to note that in this case, the payment of Mr and Mrs Retiree superannuation benefit to each other as a pension will be tax-free. However, payment of their superannuation benefit to their adult children is likely to be taxable.)

Mr Retiree died 4 years after putting his Will and superannuation arrangement in place.

Myth #3 – a binding death benefit nomination is always binding on the trustee

Fact – Under the superannuation law, a binding death benefit nomination is only binding on the trustee of a superannuation fund for 3 years. The nomination, if not renewed, will become non-binding at the end of the 3-year period. However, this 3-year rule may not apply to a self-managed superannuation fund. The governing rules of a self-managed superannuation fund will determine whether a member could make a binding death benefit nomination and if so, whether that nomination will lapse after a certain period of time. Although not legally binding on the trustee of the superannuation fund, a death benefit nomination that has lapsed may still be a relevant factor for the trustee to consider.

Myth #4 – A binding death benefit nomination is binding on the trustee in respect of a superannuation benefit that is providing a pension payment to its member.

Fact – Generally, the nomination of a reversionary pensioner overrides any death benefit nomination in respect of that superannuation benefit.

There are two issues with the superannuation arrangement that Mr Retiree has put in place:

  • His binding death benefit nomination has ceased to be effective as the 3-year period has lapsed. Thus, the payment of his superannuation death benefit is to be determined by the trustee of his superannuation fund, who will need to consider if some of his superannuation fund benefit should be paid to Mrs Retiree.
  • Even if his binding death benefit was effective, the nomination of Mrs Retiree as reversionary pensioner will override the binding death benefit nomination.

Once a member has commenced a pension payment from a superannuation fund, they have effectively entered into a separate contractual arrangement with the superannuation fund in respect of the payment of the pension. The nomination of a reversionary pension will generally override any binding death benefit nomination in respect of the superannuation benefit that is providing the pension payment.

In the case of Mr Retiree, the nomination of Mrs Retiree as the reversionary pensioner means that his superannuation benefit will continue to be paid as a pension to Mrs Retiree after his death. If Mrs Retiree subsequently died without fully exhausting the superannuation benefit that is providing the pension, the balance of Mr Retiree’s superannuation benefit is likely to then become part of Mrs Retiree’s superannuation death benefit rather than be paid to the estate of Mr Retiree. This means that the balance, if any, of Mr Retiree’s superannuation death benefit will likely be distributed in accordance with Mrs Retiree’s nomination (if she has a valid nomination in place at her death), or otherwise determined by the trustee of Mrs Retiree’s superannuation fund. Either way, that part of Mr Retiree’s superannuation benefit is unlikely to be paid to his children because it is now part of Mrs Retiree’s superannuation death benefit.

Conclusion

The case of Mr and Mrs Retiree illustrates the conflict that can sometimes arise between a tax effective estate plan concerning superannuation and a plan that corresponds with a client’s wishes. That is, achieving a particular objective may result in a tax liability which cannot be avoided. Importantly, the family or commercial objectives are always paramount and tax should never be the driving reason for making a particular decision. Having said that, if the family or commercial objectives can be achieved tax effectively then so much the better. This case also demonstrates the importance of reviewing and updating estate and superannuation arrangements on a regular basis. With superannuation becoming an increasingly large component of a person’s wealth the need for regular reviews of superannuation arrangements assumes even greater importance.

Author: Kar Na Tan

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