For many Australians, superannuation is one of the most significant assets they will accumulate over their lifetime. Yet, a common misconception is that superannuation automatically forms part of a person’s estate and is distributed according to their Will. In reality, superannuation is held in a separate trust structure and the fund’s trustee will only pay the member’s superannuation benefit to the estate following an exercise of its discretion in favour of the estate or if the member has made a valid nomination directing it.

The limited nature of superannuation creates unique challenges in estate planning, particularly in blended family situations. That’s why, it’s important for members to make informed beneficiary nominations to ensure superannuation benefits are distributed according to their wishes.

 

superannuation and the estate: why the distinction matters

 

Unlike other personal assets such as property or bank accounts, a member’s benefit in a superannuation fund [referred to as the member’s ‘death benefit’] does not automatically pass under the terms of your Will. Instead, it’s dealt with separately by the superannuation fund trustee, who is required to pay a member’s benefits in accordance with superannuation law and the governing trust deed.

If, at the time of a member’s death, there is a valid binding death benefit nomination, a reversionary pension or other hard-wired provisions [where it’s a self-managed superannuation fund] exist, the trustee must pay the member’s death benefit in line with those instruments. Otherwise, the trustee has discretion to distribute the member’s death benefit amongst the eligible beneficiaries.

Superannuation nominations should not be dealt with separately from the Will. Instead, they need to be considered together as part of a broader estate planning strategy. This approach allows important factors such as family dynamics, tax implications and asset ownership to be assessed and managed so that a member’s death benefit and other assets are distributed in the most effective way to meet their objectives.

 

eligible beneficiaries: who can receive superannuation benefits?

 

Whilst a testator [the one who creates and signs the Will] is free to pass their estate to any person or institution they choose under their Will, superannuation laws limit who can receive a member’s death benefit.

Eligible beneficiaries include:

  • Spouse, including married or de facto partners.
  • Children, regardless of age.
  • Other dependants, including those in an interdependent relationship or who were financially dependent on the deceased.
  • The estate, also known as the legal personal representative, allowing distribution in accordance with the terms of the Will.

How the benefit is paid to the eligible beneficiaries [e.g. pension or lump sum] and the tax implications can differ for each of these beneficiaries.

 

the importance of nominating beneficiaries

 

If the member does not validly nominate how their death benefit is to be paid amongst their eligible beneficiaries, the superannuation fund trustee will decide how the death benefit is paid. Superannuation law does, however, provide several ways for a member to nominate how a death benefit is to be paid.

 

binding death benefit nominations

 

A binding death benefit nomination [BDBN] instructs the trustee to pay the benefit to nominated dependants or the estate. Provided the nomination is valid, the trustee has no discretion and must comply.

BDBNs are a useful tool for ensuring certainty but generally lapse every three years unless renewed. However, some funds now offer non-lapsing binding nominations, which remain valid until revoked, providing longer-term certainty.

 

non-binding death benefit nominations

 

By contrast, non-binding nominations serve only as guidance for the trustee, who retains discretion in deciding how to distribute the benefit. While this approach allows flexibility, it also introduces the risk that the trustee’s decision may not align with the member’s intentions, particularly in blended family scenarios.

 

other options

 

In some cases, all or part of a member’s death benefit may be dealt with by reversionary pensions, which automatically revert from the deceased to an eligible beneficiary upon death, or by hard-wired clauses in the superannuation fund’s trust deed, particularly for self-managed superannuation funds.

These mechanisms are good alternatives for creating certainty that the deceased member’s wishes will be carried out, and they highlight once again why planning is essential.

 

challenges in blended families

 

Blended families present unique challenges in estate planning, particularly when it comes to superannuation.

 

stepchildren + eligibility

In some families, stepchildren are considered by the member as their own children. However, under superannuation law, if the parent of the stepchild dies before the member, the stepchild no longer qualifies as a “child” of the member for superannuation purposes. This means the stepchild is not an eligible beneficiary of the member’s superannuation.

These situations can create a strong sense of unfairness and reinforce why careful estate planning matters. The issue could have been managed, for example, by directing the benefit to the estate or establishing other arrangements to ensure the stepchild received an appropriate share of the superannuation.

 

“pay my spouse now, then my kids later”

We often see this in second or later marriages, where the member wants their superannuation to be paid to their current spouse but, upon the spouse’s death, for any remaining benefit to then pass to the member’s children from an earlier relationship.

Currently, there is no mechanism within superannuation law to achieve this directly. This objective needs broader estate planning measures, such as allocating part of the member’s superannuation to the spouse [and by extension, their estate and children], directing benefits through the estate, or providing the spouse with other assets or structures that deliver income during their lifetime.

 

multiple spouses under the law

Another complexity arises where a member has multiple spouses under superannuation law. This situation can happen if the member remains legally married to a spouse from many years ago, without obtaining a divorce, while also having lived with a de facto spouse for an extended period.

On the member’s death, both the legal spouse and the de facto spouse may qualify as “spouses” under the legislation, each with a claim to the member’s death benefit. This can make administering and distributing the benefit more complex.

 

managing the risks

To manage these risks, individuals in blended family situations should take proactive steps as part of their broader estate planning. This involves carefully considering, during their lifetime:

  • how superannuation will form part of their overall estate plan,
  • how much should be set aside for a current spouse and for children from previous relationships,
  • which instrument is most appropriate to direct the benefit after death [whether through a binding death benefit nomination, a reversionary pension, or bespoke hard-wired provisions in the trust deed],
  • what other assets may be available to balance competing claims, and
  • whether mechanisms such as mutual wills are suitable to provide greater certainty once the member has passed away.

 

managing family provision application [FPA] risk

 

Family Provision Applications [FPAs] allow eligible persons to challenge a Will if they believe they have not been adequately provided for. Although superannuation is not automatically part of the estate, directing benefits to the estate increases its value and therefore exposes those benefits to potential claims. Conversely, for Queensland, directing benefits outside the estate through one of the instruments described keeps the member’s death benefit out of the pool of assets that can be contested.

The decision as to whether a death benefit should be paid to the estate or outside it should never be made in isolation. Getting expert advice is essential, as other factors such as the blended family scenarios discussed above and taxation consequences must be considered before reaching a decision.

 

taxation considerations

 

Tax can have a big impact on how superannuation death benefits should be paid. For instance, benefits paid to a spouse or dependent minor children are generally tax-free, while payments to non-dependants [such as adult children] may attract significant tax liabilities.

 

we’re here to help

If you’re thinking about how your superannuation should be managed, particularly in the context of a blended family, it’s important to get tailored advice.

Our estate planning lawyers can work with you to review your beneficiary of superannuation nominations and help ensure your arrangements are integrated into a broader estate plan that reflects your wishes and family circumstances.

Reach out to myself or Neal Dallas at legal@businessdepot.com.au or give us a call on 1300 BDEPOT.

 

want more estate planning + wealth advisory insights?

Sign up to our mailing list below!