Superannuation is often one of the most significant assets a person owns, making it a critical part of estate planning. Unlike other assets, superannuation does not automatically form part of your will, meaning it’s essential to have a clear strategy in place to ensure your death benefits are distributed according to your wishes.
Who Can Receive Super Death Benefits?
Super Dependants (SIS Act 1993)
A super dependant is someone who can legally receive a super death benefit directly from a super fund. This includes:
- Spouse or de facto partner (including same-sex partners)
- Children of any age (including adopted and stepchildren)
- Anyone financially dependent on the deceased at the time of death
- Anyone in an interdependency relationship with the deceased
If a beneficiary does not meet these criteria, the death benefit must be paid to the deceased’s estate and then distributed according to their will.
Tax Dependants
Tax law determines whether a beneficiary pays tax on a death benefit. A tax dependant includes:
- Spouse or former spouse
- Children under 18
- Financially dependent adult children
- Interdependent individuals
- Dependants of Defence or emergency service personnel who died in the line of duty
If a beneficiary is not a tax dependant, they may be subject to tax on the taxable component of a lump sum benefit.
How Are Death Benefits Paid?
A super death benefit can be paid in two ways:
- Lump sum payment – Can be paid to any super dependant or the estate.
- Income stream (pension) – Only available to certain dependants, such as a spouse, children under 25, or a person with a permanent disability.
If a pension is paid to a child, it must be commuted to a lump sum when they turn 25, unless they have a permanent disability.
Tax on Super Death Benefits
The tax treatment depends on who receives the benefit and the components of the superannuation balance.
- Tax-Free Component – Always tax-free, regardless of the recipient.
- Taxable Component (Taxed Element) – Tax-free if paid to a tax dependant, but subject to 15% tax + Medicare levy if paid to a non-tax dependant.
- Taxable Component (Untaxed Element) – If the benefit includes life insurance proceeds, tax may be up to 30% + Medicare levy for non-tax dependants.
Death Benefit Nominations: Ensuring Your Wishes Are Followed
To control where your superannuation goes, you need to make a death benefit nomination with your fund.
- Non-Binding Nomination – The trustee considers your wishes but has discretion.
- Binding Nomination (BDBN) – Legally binds the trustee to follow your nomination. Must be renewed every three years unless it’s a non-lapsing nomination.
- Reversionary Pension – Ensures an existing pension automatically continues to a chosen dependant.
Strategic Estate Planning Considerations
Holding Life Insurance Inside vs Outside Super
- Life insurance inside super can create taxable untaxed elements in death benefits for non-tax dependants.
- Holding policies outside super can avoid this tax.
Recontribution Strategy
- Withdrawing and recontributing funds as non-concessional contributions can reduce the taxable component of super, benefiting adult children and other non-tax dependants.
Super and Wills
- Super does not automatically form part of your will.
- If nominating your estate, ensure your will is up to date and structured effectively.
Final Thoughts: Take Control of Your Super Estate Plan
A well-structured superannuation estate plan ensures your benefits go to the right people in the most tax-effective way.
Key Takeaways:
- Super death benefits don’t automatically follow your will – ensure you have the right nominations in place.
- Who receives the benefit affects the tax treatment.
- Consider strategies like recontribution and life insurance outside super to minimise tax for your loved ones.
Need help structuring your super estate plan? Get in touch today for expert guidance.