Where does your superannuation go when you die?

The fate of superannuation savings upon death is not always clear-cut. Estimates suggest that 15.5 million Australians may have failed to set up a binding death benefit nomination, which essentially determines who receives super money and any associated insurance payouts.

A binding nomination allows the super fund to pay the designated dependant or legal personal representative (the executor of the deceased's will) directly, bypassing any ambiguity that may arise from a non-binding nomination or the absence of a nomination altogether. Dependents are generally defined as individuals with whom the deceased shared an interdependent relationship, such as spouses, children under 18, and certain dependents with disabilities or financial reliance.

However, determining who qualifies as a dependant can be complex, and legal advice is often recommended.

Superannuation does not automatically become part of the deceased's estate or be distributed as per their will. Therefore, if an individual wishes to ensure that super funds are allocated to someone outside the realm of legal dependants, such as adult children or friends, these assets must pass through the estate governed by the will. In this case, the executor named in the will must be formally nominated as the beneficiary within the superannuation fund.

The nomination process typically involves logging into the member's online portal or requesting a death benefit nomination form from the super fund. The nomination must then specify the legal personal representative. Some funds do not permit digital binding nominations and require paper forms with two wet signatures, so it is essential to verify the requirements with the specific super fund.

Additionally, superannuation death benefit nominations typically lapse after three years, necessitating regular renewal to maintain validity. The Australian Taxation Office (ATO) emphasizes that superannuation funds are obligated to distribute to dependents over other beneficiaries, as taxpayers should not subsidize the distribution of super funds to estates.

If an individual is single, without children, and has no financial dependents, the process can be more streamlined to accommodate their wishes as outlined in their will.

It is also crucial to note that superannuation death benefits are subject to taxation. Dependents, including spouses or children under 18, face no tax liability, while non-dependents, such as independent adult children, may be subject to up to 32% tax on the taxable components of the payout. The tax treatment of a superannuation death benefit hinges on the recipient's dependency status and the nature of the superannuation account components, including tax-free, taxed, and untaxed portions.

The tax rates further depend on whether the benefit is paid as a lump sum or through an income stream (pension), and whether the benefit includes an insured component and if the super fund has claimed a deduction for insurance premiums. Therefore, the tax implications of inheriting superannuation vary significantly based on the recipient's circumstances and the specifics of the superannuation benefit being transferred.