Do I get my spouse’s superannuation if they die?

It depends.

You have your own self-managed superannuation fund (SMSF) and you and your husband are the only members and the directors of the SMSF trustee. Unfortunately, your husband dies. His will leaves everything to you.  Doesn’t his super automatically go to you?

No it doesn’t.

A member’s will does not control where their super goes after death and thus why SMSF Estate Planning is so important.

The superannuation laws (SISA) and the governing rules of a SMSF control who a death benefit can be paid to. A SMSF trustee decides who a member’s death benefit is paid to unless a member has nominated a death benefit beneficiary and made that nomination binding.

Superannuation death benefits do not automatically form part of a deceased person’s estate and can be paid to a beneficiary directly from the person’s SMSF. A death benefit must be paid as a lump payment or a pension or a combination of both.

Under SISA, death is a requirement for a mandatory death benefit payout. Otherwise, superannuation benefits can remain in an SMSF indefinitely. There are other SISA and tax rules which indirectly restrict superannuation balances by limiting contributions to a fund and the amount of super a member can hold in pension mode.

How does a SMSF trustee decide who to pay a death benefit to?

A SMSF trustee must act in accordance with the fund’s trust deed and SISA.  The trust deed can restrict who a death benefit is paid to provided there is no conflict with SISA. A death benefit can be paid to your beneficiary who is your “dependant” or your “personal legal representative” (your estate).  A death benefit can be paid as a lump sum or a pension or a combination of both.

The definition of a SISA dependent determines who can receive superannuation death benefits. They can be a spouse (excluding a former spouse), child, a person who is financially dependent on the deceased, or in an interdependent relationship. Adult children are restricted to receiving a lump sum payment. A child under 18 at the time of death can receive a death benefit pension which must be converted to a tax-free lump sum at 18 unless they are disabled. Adult children aged between 18 and 25 who are financially dependent on the member can take a death benefit pension until age 25 when it converts to a tax-free lump sum payment.

The definition of a Tax dependant or a death benefit dependant determines who can receive a lump sum death benefit tax free.  A death benefit pension paid to an eligible pension recipient is generally tax free except if the deceased person was under 60 at the time of death and the beneficiary is also under 60 at the time of payment. A tax dependant includes a spouse or former spouse, a child under 18 and any person with whom the deceased had an interdependency relationship or who is financially dependent on the deceased.

Hint –an eligible pension recipient in the case of a child includes a child under 18, a child 18 years or over but less than 25 and financially dependent on the member or more than 18 and has a disability.

Subject to the fund’s trust deed a member can make a death benefit nomination which can include a:

• binding death benefit nomination (BDBN)
• non-binding death benefit nomination (NBDBN)
• death benefit agreement (DBA)
• reversionary pension nomination (RPN)

A Binding Death Benefit Nomination (BDBN) or a death benefit agreement (DBA) provides certainty over who will receive your superannuation upon death. However, there are many court cases contesting BDBNs that were not validly drafted. It is essential to ensure a BDBN is correctly prepared and executed with valid beneficiaries, which should be regularly reviewed to ensure it remains consistent with your wishes. This helps prevent unintended parties from receiving your superannuation benefits.

There are certain life events when it is vital to review who gets your super including marriage, having children, divorce, death of a spouse/partner, adopting a child or inheriting stepchildren.

A Non-Binding Death Benefit Nomination (NBDBN) contains the member’s wishes but ultimately the trustee decides who to pay the benefits to.  A nominated reversionary pension beneficiary will automatically continue on with the same pension provided the beneficiary is an entitled recipient such as a spouse and not an adult child of the deceased.

The fund’s trust deed should determine the order in which the death benefits are paid.

Binding Death Benefit Nomination vs Will

A member is able to direct where their super goes via a BDBN which can include the legal personal representative (LPR) of the member’s estate. The member’s will specifies who receives their estate including their superannuation benefits if they have nominated their LPR as the beneficiary or the SMSF trustee determines the benefits should be paid to the member’s LPR.

Death benefits paid to a member’s estate can be paid to anybody. Death benefits paid in accordance with a BDBN can only be paid to a SISA dependant.

A death benefit recipient may receive payments directly from the SMSF. Conversely, if death benefits are paid to the member’s estate, they are subject to the probate process and subsequent payment, which can become complicated in the event of a contested will.

What happens if the SMSF member has not made a death benefit nomination?

The SMSF trustee will decide who the death benefit is paid to.

A trustee must consider all of a member’s possible beneficiaries and any other relevant matters before deciding to pay out the death benefits.

Hint –SISA allows a benefit to be paid to anybody (must be an individual) if no dependants can be found or the member has no LPR.

SMSF Estate Planning

Receiving advice about how you want your superannuation benefits paid and who they should be paid to can potentially save significant amounts of tax as well as peace of mind knowing your benefits are going where you want them to go. The following are important issues to be considered:

• Fund Control
• The SMSF trust deed
• Individual trustees vs corporate trustee
• Legal personal representative (LPR)
• Enduring Powers of Attorney (EPOA)

An SMSF trustee has significant control over death benefit payments. Do you know who will manage your SMSF after you pass away? If you have a corporate trustee, does the constitution allow your spouse to remove and appoint new directors? If your spouse is your LPR, do they need to appoint another trustee/director? What paperwork is necessary? Do you want the SMSF to continue or be wound up?

What does your SMSF trust deed say about a death payment and who can be trustee?

One of the requirements under SISA is that all of the fund’s assets must be in the name of the SMSF trustee.  Changing everything owned in the fund for an SMSF with multiple assets can be costly and stressful, especially during a time of grief. When one trustee dies, all titles must be changed to reflect of the names of the remaining or new trustees. With a corporate trustee, only the director may need to be changed, as everything that is owned is still in the corporate trustee’s name. Death is an example of why we strongly recommend a corporate trustee for your SMSF.

SISA allows the deceased member’s LPR to step in as a trustee/director.  This is not automatic and the trustee/director must be properly appointed. The LPR can only operate until the death benefits start to be paid out. There is a six-month window to restructure your SMSF and remove the LPR and appoint a new trustee/director.

An EPOA lets someone act as an SMSF member and become a trustee when the member loses capacity or is abroad for an extended period.  However, the EPOA ends when the member dies. While an EPOA is crucial in estate planning, it’s also important to consider post-death arrangements.

Estate planning is an essential part of managing a Self-Managed Super Fund (SMSF). It is important to not only nominate the beneficiaries of your superannuation fund, considering the tax implications for each beneficiary, but also to ensure that your superannuation assets are distributed in accordance with your wishes.