SMSF and Death – what happens to your super when you die

Together with the family home, the most substantial asset that most people leave behind when they die is the balance of their superannuation fund. However, ensuring that your superannuation goes to the intended beneficiary can be harder than you might expect. In this article, we look at how superannuation is dealt with after death, what you can do in life to ensure that your super goes where you want it to go, and what the tax consequences are for your beneficiaries.

Can I deal with my superannuation through my Will?

Typically, the answer to this is no. Whilst most of your assets will indeed be distributed to your beneficiaries in accordance with your wishes as expressed through your Will, superannuation is a significant exception.

In short, your super does not form part of your deceased estate. Instead, when you die, your superannuation fund will pay out to beneficiaries at the discretion of the trustee of the fund. Setting out in your Will how you want your superannuation dealt with will therefore potentially be ineffective. Whilst the trustee of a super fund will often take into account the terms of the Will in determining who gets what, they are not bound by it, since the trustee retains ultimate discretion as to how to pay out the fund.

So, how do I determine who gets what?

The answer to this is to make sure that you have taken the necessary steps in life to make it clear to the trustee how the fund should be distributed. Unless you stipulate otherwise, the law only allows scheme trustees to pay out to your dependents or into your estate (in which case, the Will, which dictates how the estate is administered, will be relevant).

If you have specific instructions as to who get what, the best way to express this is by setting up a Binding Death Benefit Nomination. This is a direction set up by the fund member during their lifetime that nominates the beneficiaries who are to benefit from the super (and in what form, ie a lump sum or a pension) on the death of the member. As the name suggests, such a nomination is binding on the trustees and overrides their general discretion.

And how will the beneficiaries be taxed on my super when they receive it?

Super paid after a person’s death is called a ‘super death benefit’. The tax on a super death benefit depends on a number of circumstances including:

  • whether the person receiving the benefit is a dependent or non-dependent of the deceased person
  • whether the benefit is paid as a lump sum or super income stream
  • whether the super is taxable or tax-free and whether the super fund has already paid tax on the taxable component
  • the age of the person receiving the benefit
  • the age of the deceased person when they died.

As a general rule, death benefits paid to dependents are tax-free though the table below illustrates in detail how death benefits are applied when paid to a dependent of the deceased:

Age of deceased at death Type of death benefit Age of recipient Tax on taxed element Tax on untaxed element
Any age Lump sum Any age 0% 0%
Age 60 or over Income stream Any age 0% MTR less 10% offset
Below age 60 Income stream Age 60 or over 0% MTR less 10% tax offset
Below age 60 Income Stream Below age 60 MTR less 15% offset MTR (no tax offset)

 

The table below illustrates how death benefits are applied when paid to a non-dependent of the deceased. As a general rule, tax is payable at a higher rate when paid to a non-dependent.

Age of deceased at death Type of death benefit Age of recipient Tax on taxed element Tax on untaxed element
Any age Lump Sum Any age Max 15% Max 30%
Any age Income stream Any age Not permitted after 1 July 2007. Death benefit streams commenced prior to 1 July 2007 taxed as if paid to a dependent Also not permitted.
Also taxed as if paid to a dependent.

 

Note: MTR = Marginal Tax Rate, ie the tax rate of the beneficiary based on their taxable income.

Who is a Tax Dependent?

As can be seen above, the tax payable by the beneficiary is linked to whether or not the beneficiary is a dependent of the deceased or not. For tax purposes, the definition of a dependent includes:

  • a surviving spouse or de facto spouse
  • a former spouse or de facto spouse
  • a child of the deceased who is under age 18
  • any other person who was financially dependent on the deceased
  • any person who had an interdependency relationship with the deceased

All other recipients would be non-dependents. So, super paid out of the deceased estate to brothers, sisters, parents or adult children would normally be taxed at non-dependent rates unless there was some form of financial dependency between the deceased and the recipient (for example, the recipient was handicapped and financially supported by the deceased).

Crucially, the fact that adult children are not regarded as dependents, and are taxed at higher levels, means that it’s crucial to keep a close eye on your estate planning. As children pass the age of 18, and move from dependents to non-dependents, you may want to revisit who gets what from your super on death.

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