When a superannuation fund member dies, the fund trustee pays the death benefit to their eligible dependants or to their estate. This is one area of super where there have not been incessant changes to the rules in recent years. However, super fund members are often not familiar with the requirements on death benefit nominations. The main issues relate to the types of nominees and the classes of nominations.
Types of nominees
Superannuation law provides that a super death benefit can only be paid to a legal personal representative or a dependant.
The legal personal representative (LPR) is the person responsible for ensuring that various tasks are carried out on behalf of the estate for a person who has died. A person may be appointed to the role by being named as the executor in the will or where there is no will, by being appointed as administrator of the estate by the Supreme Court.
A dependant includes a spouse, a child, a financial dependant or any person with whom the deceased had an interdependency relationship.
A spouse is the surviving partner of a legally married couple or a de-facto couple (either same sex or opposite sex).
A child may be:
- an adopted child, a stepchild, or an ex-nuptial child of a person
- a child of a person’s spouse, or
- a child within the meaning of the Family Law Act (mainly covering artificial conception).
Whilst a stepchild is included in the definition of a child, note that the dissolution of the relationship between the parent and the stepparent severs the stepchild relationship. That is, if the natural parent dies or separates from the stepparent, the stepchild/parent relationship ceases at that time. The child may however still qualify as a financial dependant or under an interdependency relationship.
Two people have an interdependency relationship if:
- they have a close personal relationship, and
- they live together, and
- one or each of them provides the other with financial support, and
- one or each of them provides the other with domestic support and personal care.
Two people may still have an interdependency relationship if they have a close personal relationship but do not live together due to disability or temporary absence (for example if one person lives overseas for work). Otherwise, it is important to note that all four of the interdependency conditions must be met.
It is up to the trustee’s discretion to determine the recipient of a member’s death benefit. The two exceptions to this rule are member-directed nominations for small funds and binding death benefit nominations.
Classes of nominations
The nomination options include:
1. Member-directed nominations
SMSFs and small APRA funds (SAFs) are exempt from the provisions of superannuation law which prohibit a person who is not a trustee from exercising a discretion as to who will receive the death benefit.
Members of SMSFs and SAFs are able to incorporate certainty in the nomination of beneficiaries using a clause in the fund’s trust deed. Such a clause would typically state that:
- if a member nominates a valid dependant, the benefit shall be paid to them.
- if there is no nomination, or the nomination is invalid, the benefit shall be paid to the LPR.
2. Reversionary pensions
Upon the death of the pensioner, payments from reversionary pensions revert to the reversionary beneficiary. If the reversionary beneficiary pre-deceases the pensioner, the benefit would ordinarily pass to the pensioner’s estate. From 1 July 2017, the maximum amount that can revert to a spouse is generally $1.6 million.
These types of nominations generally provide certainty and peace of mind for clients. In most situations, the surviving spouse simply needs to notify the trustee of the death and a new bank account number.
Since 1 July 2007, death benefits cannot be paid in the form of an income stream to children over the age of 25 unless they are disabled. Accordingly, adult children cannot generally be nominated as reversionary beneficiaries.
3. Binding nominations
A binding nomination can provide certainty as to who receives the member’s death benefit based on a nomination of the person(s) to whom the death benefit will be paid. This nomination is an exception to the rule that no one other than the trustee can exercise a discretion.
Before this exception is granted, the following conditions must be met:
- The trustee must give the member sufficient information to understand the nature of a binding nomination.
- The nomination must nominate a superannuation law dependant.
- The nomination must be in writing.
- The nomination must be signed and dated in the presence of two witnesses.
- The witnesses must be over 18 and not a nominated dependant or LPR.
- The nomination must be clear and unambiguous.
- If the nomination is not clear, the trustee must seek clarification as soon as practicable.
- The nomination expires after three years.
- The nomination may be amended or revoked.
The fund’s trust deed must also permit binding nominations. If a trustee accepts a nomination that meets the criteria stipulated in superannuation law, the trustee is bound to make the payment in accordance with the nomination.
However, a binding nomination can never bind a trustee to make a payment to a person who does not meet the definition of a dependant.
4. Nominated beneficiaries
A beneficiary nomination is an expression of wishes which is not binding on trustees. As with all other types of nominations, a nominated beneficiary must meet the superannuation law definition of a dependant.
With the exception of SMSFs and SAFs, once discretion has been exercised as to the intended recipients of the death benefit, the trustee is required to undertake a claim staking process to identify potential beneficiaries and inform them of their intentions as to how the benefit will be distributed.
Potential beneficiaries include anyone who meets the superannuation law definition of dependant. The potential beneficiaries have 28 days to object to the trustee’s intention. If a potential beneficiary objects to the intended distribution, the trustee must obtain further information about the potential beneficiaries’ level of dependency, reassess their decision, and re-commence the claim staking process.
If potential beneficiaries are dissatisfied with the trustee’s decision, they may lodge a formal complaint through the fund’s internal complaints process. If they remain dissatisfied, they can refer their complaint to the Superannuation Complaints Tribunal.
Issues continue to arise when people are nominated who do not meet the definition of a dependant, such as where a member wishes to nominate their parents to be the recipients of their death benefit, but they are not living with their parents nor are they providing them with financial support. In this instance, the member would need to prepare a will and direct the superannuation to the LPR. The trustee would not be able to make the payment to the member’s parents.
In retail, corporate, or industry super funds, certainty is obtained by completing binding nominations or reversionary pensions. The most certain outcome for SMSFs and SAFs is to include the requirement to pay a nominated dependant in the fund’s trust deed.
Members should review their death benefit nominations to ensure no issues arise later.
Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.