Many Australians assume that when they die, their superannuation will be distributed in accordance with their will. The reality, however, is that without a super death benefit nomination in place, what happens to your super will be decided by the trustees of your super fund. This means that the people you want to benefit may miss out, or worse, that people you wish to exclude may receive a windfall.
What is a death benefit nomination?
This is a written instruction that outlines who should receive your super in the event of your death. This nomination is then used by your super fund to distribute your total benefits (including any associated life insurance policy payments) to your beneficiaries. The superannuation laws define who is eligible to receive super death benefits, which includes spouses, children and financial dependants.
You can also nominate that your super is paid to the executor of your will (called your legal personal representative), who then must distribute it in accordance with your will.
Who you choose to nominate can have significant tax implications. So, while it may seem like a straightforward process, the importance of making a considered nomination can't be overstated, as was recently seen with the estate of former RACGP president, the late Dr Harry Nespolon.
The power of a death benefit nomination
In 2019, Dr Nespolon was diagnosed with inoperable pancreatic cancer and took steps to ensure his wishes were documented.
Part of Dr Nespolon's assets was a self-managed superannuation fund, that included a life insurance policy, worth approximately $4.7 million.
In initial discussions with his solicitors and accountants, Dr Nespolon indicated he would like his superannuation to be paid to his estate. This would have resulted in his superannuation being held in a trust under his will, with Dr Nespolon's executors controlling the proceeds and how these would be distributed among his de-facto partner and their two children.
However, following further advice about the tax implications, on the day of his death, Dr Nespolon made a new nomination to pay his entire superannuation benefit to his de-facto partner, so she would receive the lump sum payout of $4.7 million tax free.
A legal challenge ensued to determine whether Dr Nespolon had sufficient mental capacity to make the nomination on his death bed, and whether he had made the nomination of his own free will or under duress.
After considerable scrutiny of the months leading up to his death by the New South Wales Supreme Court, it was found that Dr Nespolon was capable of making the nomination and had done so of his own free will. As a result, his de-facto partner was awarded the entire superannuation death benefit, more than two and a half years after his death.
Making a death benefit nomination
As Dr Nespolon's case shows, a death benefit nomination can have a significant financial impact on those around you.
Without a valid nomination in place, the trustees of your super fund will determine who should receive your super and may choose someone you didn't intend to benefit.
It's important that your estate plan reflects your current situation and objectives. If you haven't reviewed your super death benefit nomination in the last three years or have never made one, now might be the time to do so.
There may also be circumstances where it may be preferable to have the trustees of the super fund make the decision about who will receive your super after your death, particularly if you have a self-managed superannuation fund and have some control about who those trustees will be.
You should seek legal and financial advice before executing a super death benefit nomination to ensure it's compatible with your will and overall estate plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.