What actually happens to your super when you die

There is a lot of myth and strange rumour out there about what happens to your Superannuation when you die. What I am going to do in this piece is to try and dispel those myths and rumours so you can understand exactly how it works, because only then can you properly plan for it.

Superannuation, and the insurances attached to superannuation, is in
many cases the largest asset you own – and almost always play a vital role in an estate plan, and there are strict rules surrounding it.

Is Super your asset?
Superannuation, or super, of course is money that is paid on your behalf by your employer to a fund to be saved and invested while you are working, so that you can enjoy a pension or income when you are retired. However, superannuation is not actually owned by you even though it feels like it – rather, it is held on trust for you by the trustee of whichever super fund you are a member of. This means it is not your asset to give away in your Will as you would give away other assets, such as cash or shares or real estate.

The Mystery of Binding Death Benefit Nominations
The only way to ensure your super is paid to who you actually want it to be paid to, is to make a Binding Death Benefit Nomination (BDBN). Each super fund will have its own form and method of making a BDBN. Some super funds will allow you to make a non-lapsing BDBN, whereas BDBNs made with other funds will expire every three years and have to
be renewed. Some super funds will not actually allow you to make a BDBN at all such as GESB, for example, which is the nominated fund for State Government workers in Western Australia. GESB will only pay death benefits to a deceased individual’s ‘Legal Personal Representative’ (LPR) (which is your Executor of your Will, or of you don’t have a Will, the Administrator of your estate). Some funds will allow you to make nominations that are not binding, but simply show how you wish for your death benefits will be paid. This is merely a kind suggestion to the Trustee of your fund and is ultimately up to the discretion of the trustee.

There are so many different super funds (and now so many people have their own self-managed super funds (SMSF) that the only way to know what works is to ask your super fund, or read their online information, or read the actual trust deed (especially if you have an SMSF).

Who can you give your Super to?

The superannuation laws in Australia dictate that there are very specific- and very limited classes of people who you can give your super to on your death.   In short, you can only give your super to:

1. your spouse or your de facto partner;
2. your children;
3. a person who is financially dependant on you or with whom you share a financially interdependent relationship; or
4.  your LPR.

Depending on your super fund, you can usually split up your death benefits proportionally between two or more of the above classes.

You cannot, for example, give your super to your parents, or your brother or sister (unless they are financially dependent on you) or your favourite charity.  However, you can give it to your LPR and then direct in your Will that your LPR is to give it off to your favourite charity or your parents or other person.  There are also different tax results for giving super to different classes of people.

Your Super and Your Estate Planning

If all or part of your death benefits are paid to your LPR, it then becomes an asset of your estate, which means your Will dictates how it is to be paid to your beneficiaries. Often, it is actually preferable for your death benefits to be paid to your estate, for example, if you want to better protect your beneficiaries’ inheritance in a testamentary trust structure, or want to authorise your LPR to utilise the death benefits to pay off estate debts, such as a mortgage.

This is why it is important for a proper and effective estate plan to not only include directions regarding your super and death benefits in your Will, but also to consider who might best benefit from your death benefits, how they might be used upon your death, and how this is best put into action. When we formulate estate plans for our clients, it often includes drafting BDBNs (if they have a self-managed super fund) or assisting them in properly completing a BDBN for their nominated fund.

The recent WA case of Gonciarz v Bienias  handed down on 1 April 2019 again highlighted the importance of making sure you have a valid BDBN in place as part of your estate plan. This case involved the payment of death benefits from the super fund REST to the tune of $541,412.20, where the Plaintiff, Ms. Gonciarz (the deceased’s widow), and the Second Defendant, Mr. Bienias (the deceased brother) were the only possible beneficiaries of the deceased’s superannuation and death benefits.

The deceased had not made a BDBN, but prior to marrying the Plaintiff, had made a non-binding nomination favour of his brother Mr Bienias.

The widow made an Application for Letters of Administration of the deceased estate (as the deceased did not have a Will) and was subsequently appointed by the Supreme Court of Western Australia as the Administrator of the deceased’s estate. At that point the widow became the LPR.  Prior to the grant of Letters of Administration being made, the widow submitted a claim to REST as the deceased’s spouse, claiming that the total death benefits payable should be paid to her. REST determined that the death benefits should be paid to the her, but the Second Defendant then lodged an objection to this determination within the statutory 28-day objection period, stating that he did not believe the deceased and the Plaintiff were actually together at the date death, and later asserting that the widow was in a position of conflict, by acting as the Administrator of the estate (the LPR) and making a personal claim on the super and death benefits.

It seems that REST changed its mind and determined to instead pay the death benefits to the estate, which prompted the widow to commence proceedings in the Supreme Court, seeking that the original grant of Letters of Administration be revoked and a replacement Administrator appointed, so that she would be free to object REST’s determination without any conflict.

Justice Tottle of the Supreme Court stated in his decision that this case again:

“highlights the importance of making wills and making binding beneficiary nominations in respect of superannuation benefits”

and that if a BDBN had been made by the deceased, there would be no argument at all.

We are always happy to chat about estate planning and super – we know it can be complex, but we can guide you through the maze and help you produce the best outcomes for your loved ones.

If you have any questions about superannuation or estate planning in general, please contact us on (08) 6244 0985, make a free initial 15 minute appointment here or download our free estate planning guides.