Why superannuation should be included in your estate planning

Whether it be an industry super fund or self-managed super fund, most Australians will have some form of superannuation. And not surprisingly, this will be one of the biggest assets people will have by the time they reach retirement age, apart from their real estate.

Usually, superannuation sits outside the assets of the estate and therefore many of us fail to consider superannuation as part of our Estate Planning.

However, all superannuation accounts allow a death benefit nomination (“DBN”), in which the account holder can name a beneficiary in case of death before the vesting date. DBN will be either binding or non-binding. The DBN directs the Trustee of the superannuation fund as to whom the death benefit should be paid out if the superannuation member dies.

Non-binding death DBN is just that, non-binding. Most people fail to realise that the Trustees are not in any way bound by a non-binding DBN. A non-binding DBN is only a guide by a member to the Trustees as to how their death benefit should be distributed, but the Trustees are free to exercise their discretion to pay the member’s death benefit to any dependants.

Unlike a non-binding DBN, a valid binding DBN (“BDBN”) is binding on the Trustees, and they must follow the direction of a valid BDBN and distribute the death benefit to the named beneficiary in accordance with the BDBN. 

Superannuation Industry (Supervision) Act 1993 (SIS Act) defines “dependant”, and any nominated beneficiary who falls outside the definition of dependant will invalidate the BDBN. SIS Act defines the dependant as the following:

1. A spouse of member

2. A child of member

3. A person in an interdependency relationship with member

SIS Act further states that an interdependency relationship exists where:

1. they have a close personal relationship; and

2. they live together; and

3. one or both of them provides the other with financial support; and

4. one or both of them provides the other with domestic support and personal care. 

Therefore, if you nominate your siblings or your parents who are not living with you to be your beneficiary then this nomination is invalid. Having an invalid BDBN will mean that you will not have any say on how and to whom your superannuation death benefit will be paid out after your death, and this decision will be left at the full discretion of the Trustees. 

Considering that your superannuation will possibly be one of your largest assets, this is putting lot of faith in someone you don’t know to have full control over your asset. Ultimately, you are allowing a total stranger to determine how your assets should be distributed after you die.

In a recent case, a 68-year-old VIC magistrate, Rodney Higgins, who was earning $324,000 a year was engaged to a 23-year-old court clerk, who suddenly died in a car accident in 2019. Ms Petrie had nominated her mother, who lived a very modest life, as her beneficiary. Ms Petrie’s death benefit amounted to $180,000. 

After Ms Petrie’s death, Rodney Higgins filed an application to receive Ms Petrie’s death benefit, stating that he was a “dependant” as a de-facto partner of Ms Petrie. Despite Ms Petrie having nominated her mother as her beneficiary, Ms Petrie’s mother did not fall within the definition of dependant under the SIS Act as Ms Petrie did not live with her mother. 

Ms Petrie’s mother’s pleas for help were ignored, and the Trustees ruled that Ms Petrie’s mother was not a valid beneficiary. The Trustees ultimately paid Ms Petrie’s death benefit to Rodney Higgins, who soon moved back to his former partner of 18 years and to their luxurious waterfront home. 

The best way to eliminate the risk of these kinds of situations from arising is by nominating your “Estate” or “Legal Personal Representative” as your beneficiary in your BDBN. This legally binds the Trustee to pay the death benefit from your superannuation to your estate, thereby legally including your superannuation to be part of the estate’s assets after you pass away.

By allowing your superannuation to be part of your estate, you have the flexibility to distribute your superannuation to absolutely anyone you wish through your Will. However, if your superannuation is not included in your estate, then you are confined to distributing your death benefit to a dependant listed in accordance with the SIS Act. This is further complicated by possible uncertainty as to who will ultimately benefit from your death benefit after you pass away due to the discretionary power of the Trustees.

Therefore, including your superannuation as part of your estate planning will reduce uncertainty and alleviate unnecessary stress to your loved ones after you pass away.