Is One of Your Biggest Assets in Safe Hands?

It goes without saying that when someone dies, particularly unexpectedly, it can be an incredibly tough time, both emotional and financially. Underpinning all this can often be lots of assumptions with respect to the relevant provisions of an insurance policy that may exist or superannuation. Today I’m joined by Michael Cowley, a director at Fox and Thomas. Michael, thanks for joining me. Michael, now, for those listening to this podcast, it may be likely they have an existing superannuation policy, and they recall probably seeing reference to the term “death benefit”, but don’t understand what it meant or means. What does it mean?

The death benefit is basically the amount that will be payable by the superannuation fund on the death of the member. With your accumulation-type account, that’s just going to be the contributions that are made and the earnings on that over time. With your defined benefit-type scheme, there’ll be a formula which will calculate what that death benefit will be. It’s important to remember that death benefits may also include life insurance, if life insurance is held through the super fund.

Michael, what about the choice people make of who this beneficiary should be? Is there some struggle around that?

It’s amazing how difficult and complex what may at first appear to be a fairly simple decision can be. There are a lot of things that people do need to consider when making a nomination. The super fund generally will allow a member to nominate who they would like to receive their death benefit. The types of things that the members of the super fund should be thinking about are, is the person they’re wanting to nominate an eligible beneficiary, because the superannuation legislation does limit who you can nominate as your beneficiary. Then, they need to be thinking about the nomination they’re making, is it going to be binding on the trustee, or is it not binding, will it lapse after a period of time, or will it remain in place until they change it?

They also need to be thinking about what the tax implications might be. Different beneficiaries might have to pay a tax on that super death benefit if it’s paid to them. Then, they need to think, does that death benefit need to go into their estate and be dealt with through their will, or should it be paid directly to that beneficiary? Then, if the member has a self-managed superannuation fund, they need to be thinking about whether they’re making the nomination in the proper way, and what the assets of the super fund might be, and whether they can be easily dealt with, following the nomination that the member’s making.

Michael, I’m assuming that there probably needs to be considerable thought in relation to who the beneficiary may be, particularly given potential tax ramifications.

That’s right, yes. As I mentioned, when you’re nominating a beneficiary for your super death benefit, you need to make sure that beneficiary is a dependent. There’s 2 levels of a dependent. There’s dependent on the superannuation legislation, which then entitles that person to receive the benefit, and very broadly speaking, that’s a current spouse, children, including step-children, and anyone who is financially dependent on the member, or who has an independent relationship with the member. That makes them eligible to receive the death benefit.

You then need to look at the tax legislation to determine, are they a dependent from a tax point of view? If they’re not a dependent from a tax point of view, then that beneficiary may have to pay some top-up tax, when they receive that benefit. People who are tax dependents and so who will receive that benefit tax-free will be spouses, or a former spouse, if that former spouse is still dependent on the member, children under the age of 18 years, or children who are still financially dependent on the member, for example, going to university, or any other person with whom that member has an interdependency relationship.

You do need to look carefully as to whether there are going to be tax implications for the beneficiary. For instance, if you’re looking to add a child who was over the age of 18 and no longer financially dependent on you, the benefit could be paid to that child, but then that child would then need to pay a tax on that benefit when it’s paid to them.

How should the benefit be paid, Michael?

There are 2 basic ways a benefit can be paid. They can either be paid out as a lump some, or they can be paid out as an income stream in the form of a pension. It will really depend on the type of beneficiary it’s being paid to and the circumstances of the beneficiary at the time. It can be a bit tricky making that nomination or that binding decision at the time a death benefit form is completed, so you need to make sure you get some pretty solid advice around which of those options you might want to choose.

There is reference, isn’t there, to a non-binding nomination and a binding nomination. What are the differences between those?

Sure. Increasingly, we’re seeing the industry funds offering binding nominations. Previously, they only offered non-binding. A non-binding nomination is where you make a nomination, but the trustee of the super fund isn’t bound to follow that nomination. I go back a step, trustees of super funds generally have a discretion who to pay the death benefit to. They can pay it to anyone who is a dependent for the purposes of superannuation legislation, or they can pay it to a beneficiary that the member may have nominated. If it’s non-binding, that means a trustee still has a discretion, if they wish to ignore that nomination and pay it to someone else who may be a dependent.

If the member wants to make sure that a particular eligible beneficiary does receive the death benefit, then they need to make what’s called a binding nomination. That takes away the trustee’s discretion, so the trustee must pay that to that nominated beneficiary.

Michael, what about the retail industry funds?

Yeah, so what we find with the retail industry funds is that they are very, very particular about how their nominations are made. They enforce the directions that they give in relation to those nominations very stringently. Any departure at all from how they direct you to make the nomination will mean that the nomination is not binding. You need to be very careful to get the forms, and read the forms carefully, and make sure that you’ve followed them exactly to allow that nomination to be binding or to be enforceable.

Michael, I suspect it’s the case that probably most people don’t take this seriously enough.

That is something that we do see quite a bit, and you can see it coming through the case law, coming through where there’s been a dispute in relation to a superannuation payment, either because the person hasn’t put enough thought into it in the first place, or they haven’t filled out the forms or followed the correct procedure. Their intended beneficiary ends up not receiving the benefit that the member had intended.

We’re increasingly seeing, superannuation has been around for quite some time now, so we’re seeing that apart from the family homes, superannuation is often the largest asset that someone will have. It’s fairly important that proper attention is paid to that superannuation and that careful thought and planning goes into who you’d like that superannuation to go to, and how you do that, to make sure it gets to that person, and gets to them as tax-effectively as possible.