Wills and Estates

Superannuation and estate planning: To include or not to include?

When it comes to estate planning, superannuation death benefits are a whole other beast to consider.

And because these benefits do not automatically form part of a person’s estate, it’s often up to the estate planning lawyer to advise their clients on what to do to achieve the best outcome.

In this article, we zero in on the important definitions – and the questions you need to ask. Thanks to Jonathon Naef, Co-founder of Balance Family Law and graduate of the College of Law’s Master of Laws (Applied Law) majoring in Estate Planning for his insights.


First things first: how super death benefits work


Superannuation funds work similarly to trusts. The funds are held and managed by the trustee (in this case, the super fund), who invests the money in various things.

That’s why the super goes up – both with the person’s contributions and the fund’s investment performance.

Because of that structure, super doesn’t automatically form part of your client’s estate. Instead, your client needs to nominate where their superannuation death benefits go to. And it will be either their estate or specific individuals.

To nominate specific individuals as beneficiaries, those individuals must be eligible super dependents as defined by the legislation. This list of people includes:

  • Their spouse
  • Their children
  • People who are in an interdependent relationship with them (i.e. they have a close personal relationship, live together and provide each other domestic and financial support)


Will-ing it to happen is not enough – you need to bind it


Some people assume that leaving directions in their will is sufficient to channel their superannuation death benefits to where they want them to go.

But it’s not always that straightforward.


A will alone is not enough to ensure that your client’s intentions are met. In some situations, the trustee still has the final say – no matter what your client’s will specifies.


Jonathon Naef, a specialist estate planning lawyer, puts it this way: “To ensure your client’s super goes where they want it to, they need to have a valid binding death benefit nomination in place.”

So, in what circumstances can clients leave directions in their will? Only when they have:

  • A binding death benefit nomination in place, and
  • They’ve nominated their estate as the beneficiary for their super

“Once they’ve nominated their estate as their super beneficiary, clients can use their will to direct where – and how – they want their benefits to be channelled,” adds Jonathon.


So, should super go in or stay out of the estate?


When deciding whether super should form part of the estate, your client’s goals and intentions are key. There are advantages – and risks – to both approaches.

Reasons to keep super out of the estate include:

  • Your client wants to pay directly to a dependent who’s listed as a valid super beneficiary.
  • There is a risk of a potential family provision claim against your client’s estate, so they need to keep their super apart to protect it.

The downside? There’s no flexibility in directing how the benefits should flow to the beneficiary. And those receiving the benefits won’t get any asset protection or tax planning advantages.

Situations where super could form part of the estate include:

  • Your client wants to pay their benefits to someone who’s not an eligible super dependent.
  • They need more flexibility for what they want to do with their super, such as forming trust structures to provide asset protection and tax planning advantages.

The biggest risk? When super is included in the estate, it becomes part of what someone can potentially claim against through a family provision application.


What about death tax?


There is no death tax in Australia. But there is potentially tax that is payable on superannuation if it flows through a non-tax dependent.

So, when advising on superannuation, you need to be aware of the super definition of a dependent – and the tax definition of a death benefits dependent.

For example, a super dependent includes all children. But a tax dependent may only include children under the age of 18.

If a super is paid to a beneficiary who is a super dependent but isn’t a tax dependent, there may be tax payable on a component of the super.

“You need to understand the different definitions and ensure that your client’s benefits pass on to the right people in the most tax effective way,” says Jonathon.


No one-size-fits-all solution


Jonathon reiterates that there’s no ‘blanket’ solution that works for everyone.

“As the estate planning lawyer, you need to look at the client’s individual circumstances and intentions to see what would work best for them,” he says.

Some questions you need to ask your clients include:

• Do they have any life insurance attached to their super?
• Do they have a self-managed or a defined benefit super fund? And if so, does the trust deed allow binding death benefit nominations?
• What’s their goal for all their assets – and where do they want them to go?
• How do they want the super benefits to be used?
• What do their family relationships look like? And are there any family provision issues or risks?

Once you have a clear understanding of the bigger picture, you can create a plan that provides your client with the best protection – and that meets their intentions.


Sometimes, it’s worth sweating the small stuff


One of the mistakes people make is to shrug off low-balance superannuation accounts.

But Jonathon warns that you shouldn’t let the small amount trick you.

“There may be just a few grand in the super. But there may be life insurance attached to that super – and that could be worth hundreds of thousands of dollars.”

A final tip: it’s not just about getting the nominations done.

“You need to really nail what your client’s intentions are,” Jonathon says.

“Find out as much about their assets and circumstances as you can. Then, walk through various scenarios with your client, advise them of the risks, design the right strategy and put the best structure in place – so your client can achieve their goals.”


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