Superannuation and estate planning should be strategised concurrently to avoid estate challenges. More specifically, how the estate deals with superannuation death benefits should be considered when drafting a Will to ensure intended beneficiaries receive the benefit and avoid a costly and drawn-out legal battle.
Is a superannuation death benefit part of an estate?
A superannuation death benefit is not an asset that automatically forms part of the estate. It can only be dealt with under a Will where:
- the discretion of the trustee is exercised in favour of the estate; or
- the estate is the pre-determined recipient under a binding nomination; or
- by operation of the trust deed.
Once one of the above occurs, a Will may deal with the death benefit in any way the testator determines. There will be no limit on who receives it, and the benefit can even go on to form part of a testamentary trust.
When would it be preferable for superannuation death benefits to form part of an estate?
This really depends on the facts and the objectives of the testator. There are many benefits to putting in place a binding death benefit nomination to keep superannuation outside the estate, such as keeping the superannuation immune from an estate claim or ease of access to funds without needing to wait for estate administration to be finalised.
However, there can be some circumstances where it is more beneficial to direct the superannuation through the estate, such as where a testator would like a minor beneficiary to receive their entitlement through a testamentary trust controlled by parties nominated by the testator (and not their legal guardian). Another example where it is desirable that the superannuation forms part of the estate is where the person to receive the benefit is not an eligible death benefit dependent beneficiary who can receive the benefits outside the estate (e.g. a sibling). A testator should always obtain legal and financial advice.
What if I don’t want my superannuation death benefit forming part of my estate?
A person can put in place a binding nomination to ensure that the death benefits are paid directly to the intended beneficiary and outside the estate. However, a properly drafted Will should deal with the possibility of the superannuation death benefit being received, even when steps have been taken to avoid it (e.g. a binding death nomination put in place). For instance, a binding nomination may be subject to lapsing or may be invalid. Failing to cater for the possibility of superannuation forming part of the estate risks losing the opportunity to maximise estate assets and opens the door for litigation brought by disgruntled beneficiaries.
What are the implications of the superannuation death benefit forming part of a testamentary trust?
A testamentary trust may be the preferred method of dealing with superannuation once it forms part of an estate. This is because a testamentary trust comes with the benefit of income streaming and can provide extra protection for beneficiaries. However, the tax treatment can be substantially different based on the drafting of the Will.
For example, superannuation death benefits are taxed on the extent tax law dependants benefit from them. However, testamentary trusts are likely to have a mix of tax law dependent and non-dependent beneficiaries. This, combined with a trustee with wide discretion, could see the tax benefit conferred on dependents disappear, and have the estate taxed at a non-dependent rate. This can be protected against with some of the clauses discussed below.
What clauses should I consider including in a Will to deal with superannuation?
1. Equalisation clause
An equalisation clause ensures that those who receive a superannuation death benefit outside the estate receive a smaller portion of the estate than those who do not receive a superannuation death benefit. This ensures the total share of assets to each beneficiary is equal where that is in fact intended.
A case where an equalisation clause would have been helpful was Katz v Grossman, where the daughter of the deceased was the co-trustee of the self-managed super fund of the deceased. There, the daughter elected to pay herself the full superannuation death benefit outside the estate, rather than splitting it equally with her brother or the estate. As a result, she received a significantly larger share of assets than her brother.
Equalisation clauses do have limitations and can raise complex issues, e.g. they require there be sufficient assets in the estate. For example, if there are two beneficiaries, the estate assets would have to be worth at least the same amount as the death benefit, and if there were three beneficiaries, the estate assets would have to be worth at least twice as much as the death benefit and so forth.
2. Dependents clause
As mentioned above, testamentary trusts including superannuation death benefits with a mix of dependent and non-dependent beneficiaries risk attracting the trust being taxed at the non-dependent rate. This can be avoided with a dependents clause in the Will, which allows the executors to allocate the superannuation death benefits to beneficiaries (or their trusts) who are death benefit dependents under the relevant law. Doing so can result in substantial tax savings. This assumes there are dependents entitled to receive and will not be able to be adopted if non-dependents are to receive the superannuation death benefits.
3. Separate Superannuation Proceeds Trust
Another option in overcoming the tax implications of a mix of dependent and non-dependent beneficiaries in a Will is to allow an Executor to pay any superannuation entitlement or benefit received into the estate directly into a Superannuation Proceeds Trust, rather than any other trust outlined in the Will. A Superannuation Proceeds Trust is a trust established to receive the proceeds of superannuation and whose beneficiary or beneficiaries are eligible death benefit dependants as defined under the relevant legislation. In doing so, you can limit the beneficiaries of the Superannuation Proceeds Trusts to those who qualify as death benefit dependents, and ensure the benefits are taxed at the dependent rate.
4. Conflict of interest clause
Where the desired recipient of the superannuation death benefit is also the executor or administrator of the estate, it is wise to include a conflict clause that expressly authorises the executor to pay, or apply to receive, the benefits personally. This then avoids potential litigation, such as that seen in McIntosh v McIntosh where the actions of the administrator of an estate applying for superannuation benefits personally were held to be in breach of their duties as legal personal representative.
The above demonstrates there are many issues at play when dealing with superannuation death benefits, and the importance of considering them as they relate to estate matters and the proper drafting of a Will. It is important to obtain appropriate legal and financial advice, in order to avoid cracks in your succession strategy that could result in litigation.
