What Happens with my Superannuation when I die?
Does it go into my estate? Who gets my superannuation? Do I get a say?
One of the more common statements estate planning lawyers hear from younger persons, and younger families, is that they don’t have any assets – just a whole heap of debt. Which then leads to their next question – “So why do I need to bother with any estate planning?” Almost all of us would have thought something similar in their early-20s.
It’s unfortunately true that, in early-adulthood, most people have significant debts. But this overlooks our long-term livelihood, and the funds that are accruing in superannuation. From the time that you start work, your employer is required by law to pay superannuation on your behalf (currently 9.5% of your wages, but this amount will increase over the coming years to 12%). Those funds are paid into your superannuation fund, where they are invested and managed by the superannuation trustee on your behalf. Then, when you become entitled to that superannuation at retirement, you can draw upon your superannuation to fund your retirement and livelihood.
Superannuation is a trust (legally speaking) – money is paid in on your behalf, but it is held and managed by the superannuation trustee. When you become entitled to it, you can draw upon it and then use it as you please. But until that superannuation is paid to you, you do not ‘own’ it – rather, the superannuation trustee owns and manages the funds on your behalf. What you do have is a beneficial entitlement – when you satisfy certain criteria, you can require the superannuation to be paid to you (and when it’s paid to you, then you own it yourself).
Because superannuation is generally established on your behalf when you get your first job, working at a supermarket or fast food restaurant as a teenager, many of us are largely ignorant of how it operates and what it contains. Most superannuation funds offer life insurance for their members, and so whilst a superannuation balance may be relatively minimal for young persons, there is often a sizeable life insurance component – and this is why a proper estate plan is critical, no matter what stage of life you are at.
Assuming that you haven’t drawn down on your superannuation, then generally speaking, there are two different ways by which your superannuation will be paid upon your death – by way of
(a) A preferred beneficiary nomination; or by
(b) A binding death benefit nomination.
A preferred beneficiary nomination is generally made when you initially join a superannuation fund, and usually remains valid indefinitely. It’s a default position, by which you can indicate who you would prefer to receive your superannuation benefits upon your death. The nominations you make are considered persuasive, but the superannuation trustee can alter the effect of it. For example, if a preferred beneficiary nomination was made in favour of an estranged spouse, then the superannuation trustee is more likely to look for other persons who they anticipate you would have preferred to benefit – e.g. children. This discretionary element of the superannuation trustee is the critical element of the preferred beneficiary nomination.
By contrast, you can make a binding death benefit nomination by which you specify exactly who receives your superannuation benefits upon your death. So long as it’s valid, the superannuation trustee cannot change the effect of it, and must pay it exactly as specified. This is generally beneficial, but complications can arise if the nomination is not kept up to date. For example, a binding death benefit nomination in favour of an estranged married spouse remains valid until divorce – and so if you forget to update a binding death benefit nomination, it may cause your superannuation to be paid to an estranged spouse, rather than children or other dependants.
This is just a brief summary of what happens with your superannuation when you die. There are other important rules about nominations, including who can be validly nominated as a beneficiary, how long a nomination remains in place, and requirements to change a nomination. Superannuation law is a complex issue, and so proper estate planning is a critical necessity for all – even those of us who think we have very few assets to pass on.
Written by: Thomas Ashton – Senior Associate