Estate planning and superannuation

By Robin Bowerman, Head of Corporate Affairs, Vanguard Australia

Many of us spend a great deal of time planning for our retirement but understandably, often do not put the same degree of effort into planning for our deaths. It is not always a pleasant topic to think about, nor is it a commonly understood process. It is however a way of caring for your loved ones even after you pass, and one that will ensure your assets go where you want them to.

Good planning can also help your heirs minimise trouble when administering your estate—and may even reduce taxes and costs.

For most people, estate planning involves simply creating a will. While this is an important first step, sometimes having just a will is not enough when it comes to your investments. Many overlook the role of superannuation in the estate planning process.

Unlike your home and car and the money in your savings account, the investments held in your superannuation fund do not form part of your estate when you pass. That means that they cannot be dealt with by your will.

The reason for this is that, from a legal point of view, your super fund is a trust set up to fund your retirement. You don’t actually own the assets held in that trust, so in most circumstances, you can’t pass them on in your will.

Instead, super left behind after death must be dealt with in very specific ways. For starters, super can only be paid after your passing to an eligible beneficiary, usually your spouse or children, but also anyone financially dependent on you or your estate.

Handling this poorly can lead to undesirable outcomes. In the absence of suitable planning, the trustee of a super fund has discretion on which beneficiaries may inherit the super. In one famous legal case, a trustee paid everything from her father’s super fund to herself, leaving nothing for her brother.

There are two main ways to handle your super after death and both must be arranged before you pass.

The first is called a Binding Death Benefit Nomination. This important document sets out instructions to the trustee of your super fund saying how you want your death benefits (a rather macabre term that basically means the value of your remaining super) to be distributed. Provided the nomination is valid—and there are series of rules about validity including setting out precisely how it should be written, signed and dated—the trustee must follow the instructions.

The second main way to control who inherits your super after you pass is called a reversionary pension. This is an estate planning technique available to people who receive, or are about to receive, a pension from their super fund. Simply put, it is an instruction to the trustee to keep on paying your super pension to someone else after you are gone, usually your spouse.

Where it can get complicated is the interplay with the recent introduction of a $1.6 million cap on the amount of super that can be transferred to retirement phase, when earnings become tax free.

Inherited super can put your beneficiaries over the limit, forcing them to hastily rearrange their affairs. For a reversionary pension, the law allows a 12-month window after death to rearrange affairs to get back below the $1.6 million cap where required. No such time window is available otherwise.

If you bequeath your super to your estate it can then be distributed as you please, to other people in your life, according to your will. However, there are tax consequences to doing this.

Superannuation is complex at the best of times so it is always worth seeking professional advice from a licensed adviser. When combined with the intricacies of estate planning and wills, there is plenty of scope for the inexperienced to be inadvertently trapped.