If you have a valid will, you may assume that when you die your superannuation will automatically form part of the estate. However, this is not the case. Where you have not made a Binding Death Benefit Nomination, the superfund trustee has the power to decide who receives your retirement savings. This will be the case even where you have a self-managed superfund.
Unlike the executors of your will, the trustee is under no obligation to take your wishes into account, meaning your entitlements may not be distributed to your intended beneficiaries. For this reason, it is important that you nominate a beneficiary to ensure your superannuation is distributed in accordance with your wishes.
Requirements for a Valid Binding Death Benefit Nomination
When you create a Binding Death Benefit Nomination, you don’t have the power to nominate just anyone as a beneficiary. In order to be valid, you must only nominate someone who is considered your ‘dependant’. In the context of superannuation, a dependant can include your spouse or de facto partner, your children, any person who is financially dependent on you, a person with whom you have an interdependent relationship, or as is often preferable, your legal personal representative. Failure to comply with this requirement could render your nomination invalid.
Once you have determined who should receive your superannuation, you will need to ensure your nomination is signed in the presence of two witnesses over 18 years of age. These witnesses will be required to each complete and sign a witness declaration. It is common for people to assume that they can have their beneficiaries witness the nomination, but this is not the case. To preserve the validity of your nomination, it is essential that witnesses be entirely independent.
Importantly, a Binding Death Benefit Nomination will not become immediately valid after it is signed. It will only take effect once received by your superfund’s trustee. You must make your nomination in writing, clearly setting out the proportion of benefit to be paid to each person nominated. In most cases, your superfund will have a standard form where you can your nomination.
Provided your Binding Death Benefit Nomination satisfies these requirements, it will generally be binding for three years or until you change, update, or revoke it. The trustee will be bound to follow the instructions contained within your nomination even if your circumstances have changed. For example, if you have separated from your spouse or de facto partner but are not yet divorced, your ex-partner may still be entitled to the benefit. A divorce, however, will nullify your nomination. For this reason, it is essential that you regularly reassess your nomination to ensure the protection of your superannuation.
Taxation of Superannuation Death Benefits
It is important to make the distinction between the definitions of a ‘dependant’ within tax law and superannuation law. There are a number of similarities between the definition of dependency within these contexts. For example, your spouse or de facto partner, any children under 18 years old, and persons in an interdependency relationship are all considered dependants under both superannuation and tax law. However, while children over 18 years old will always be considered dependants in the context of superannuation, this is not necessarily the case for tax law.
Tax law provides that your dependants may pay a lower tax rate for superannuation death benefits compared to non-dependants. Many people presume that this means that nominating a legal personal representative as beneficiary will negatively impact dependants seeking taxation benefits. However, tax law adopts what is called the ‘look through’ approach. In determining the amount of tax payable by your beneficiaries, the ‘look through’ approach considers whether the final recipient of your superannuation disbursement is a dependant according to tax law. Therefore, even where a legal personal representative is nominated as your sole beneficiary, your dependants will still be eligible to receive taxation benefits.
Perspective Law specialises in establishing clear and comprehensive estate plans individualised to the needs of our clients. If you are interested in nominating our firm as your legal personal representative or wish to ensure your assets and superannuation are adequately protected, please call Tony today on 3839 7555 or email Tony.Crilly@Perspectivelaw.com.