Beneficiary Nominations and Superannuation – It’s a Trap!
A recent story aired by A Current Affair has highlighted the unexpected consequences which can arise in relation to the superannuation benefits of a loved one after they pass away.
Three myths often abound when it comes to superannuation and deceased estates.
Myth One
The first myth is that your superannuation will form part of the assets of your estate and be distributed according to the terms of your last Will and Testament.
This is not true.
Superannuation is considered to be its own entity. It is therefore distributed by the trustee of the superannuation fund entirely separate to your estate.
Unless the trustee determines that the funds are to be paid to the legal personal representative of the estate, those funds do not form part of an estate. It also means the superannuation benefit cannot be challenged by an eligible person pursuing a family provision claim for inadequate provision under a Will.
Read our helpful article: Splitting Superannuation in a Property Settlement
Myth Two
The second myth is that your beneficiary nomination is binding on the trustee of the superannuation fund.
This is also not true.
There are 2 types of nomination which a superannuation fund will accept – a non-binding nomination (otherwise known as an informal nomination) and a binding nomination. The difference, such as in the case of the family highlighted on the A Current Affair segment, can have significant consequences for loved ones.
Non-binding Nomination
A non-binding nomination is a nomination which the trustee of the superannuation fund will take into consideration when determining who should benefit from the funds. This means that for the family in the television segment, even though the deceased nominated all of his benefits to be divided equally between his children, the trustee chose instead to distribute the benefits to his alleged de facto spouse.
Payment by the trustee of a superannuation fund is entirely at their discretion when they are only in possession of a non-binding nomination. Whilst eligible parties to the superannuation fund may be able to appeal a decision (such as the children of the deceased), ultimately it is the decision of the trustee which will apply.
Binding nomination
A binding nomination is a nomination which the trustee of the superannuation fund must abide by irrespective of eligible parties being omitted from receiving the benefit. As such, applying the same example, a binding nomination would have ensured that all of the deceased’s benefits were divided equally between his children. The de facto spouse would not be able to challenge the nomination.
In order to be accepted as a binding nomination, a superannuation fund will have a prescribed form which must be completed. On that form, the fund will often require your signature to be witnessed by 2 people. The nomination must also equal 100% and not include people who are ineligible to receive your superannuation benefits (see Myth Three below).
Failure to properly complete a binding nomination form will result in the nomination being invalid.
Generally, a binding nomination will only last 3 years before it must be renewed. If you fail to renew your binding nomination, it will revert to a non-binding nomination.
To avoid the consequences associated with a nomination reverting to a non-binding nomination after 3 years, it may be possible to request a non-lapsing nomination. This means that the nomination will remain in place unless and until it is changed by you.
Want to know more? Wills & Estate Beneficiaries FAQs
Myth Three
The third myth is that you can nominate whomever you choose to receive your superannuation benefits.
Again, this is not true.
There are only 4 eligible parties to your superannuation benefits:
- Your spouse or de facto partner (including same sex partners); or
- A child (regardless of age); or
- Someone who was financially dependent upon you; or
- The legal personal representative of your estate.
If you nominate a person who does not fall within the above list, such as a parent, grandchild, niece/nephew, cousin or friend, your nomination will be invalid.
Taxation Consequences
Another factor which must be taken into consideration when choosing a beneficiary of your superannuation fund is the taxation consequences for those beneficiaries.
If you nominate a spouse or de facto partner, any benefit they receive is tax free (irrespective of whether it is paid to them as a pension payment or lump sum). If, however, you choose to nominate a child or someone financially dependent upon you or even the legal personal representative of your estate, taxation consequences will begin to apply and can significantly impact the amount which is ultimately received.
For beneficiaries who are also receiving a Government pension, a lump sum payment from a superannuation fund can impact upon their eligibility to continue receiving their entitlements.
Information about inheritance tax in Queensland.
What should I do?
Always review your estate plan and ensure it is up-to-date. Any significant changes in your life, or the lives of your intended beneficiaries, should prompt a review.
If you are unsure whether you have a non-binding or binding nomination, contact your superannuation fund. If in doubt, speak to a legal or financial advisor to determine the best method for the distribution of your superannuation benefits.
Do you have any questions?
If you are unsure whether your nomination is appropriate to your circumstances, contact ABKJ Lawyers on (07) 5532 3199.
For further help, read our articles on Wills & Estate Law:
