What happens to your super when you die?

Your super isn’t automatically paid through your will.

Ensure your death benefits end up in the right hands.

Most of us have a lot of money in superannuation so it makes sense to think carefully about how those benefits will be paid out upon our death.

Unlike other assets, our super isn’t automatically paid through our will. In many cases, it’s paid directly to nominated beneficiaries, so it's important to understand how these benefits work to make sure the money is passed on to the intended recipients.

In the vast majority of cases, making sure super benefits end up in the right hands is simple. But in a small number of cases, it can be quite complex and reasonably time consuming.
In all cases, you should consider seeking advice, just like you would with your will. All estate planning documents, including those you complete for your super fund benefits, are complex legal documents that are very easily fouled by those without legal training.

If your super fund has life insurance, there will be some additional processes that need to be followed. These can be complicated if the insurance is held within an administration platform or wrap account.

Creating an effective ‘Binding Death Benefit Nomination’

Some lawyers argue that there are often gaping holes in death benefit nominations and trust deed provisions that allow binding death benefit nominations (BDBN) to operate. These loopholes may allow the nomination to be picked to pieces in court, especially in the case of self-managed super funds (SMSFs) where multiple trustees are involved.

You can improve the certainty around how your super will be distributed on death, but it takes attention to detail and the help of a good lawyer. You must you understand where possible weaknesses in your BDBN might exist so these can be addressed. If you are using an SMSF, there are potentially two different types of BDBNs:
  • One that expires after three years
  • One that can potentially last until it is rescinded by the super fund member (these are often called non-lapsing BDBNs)

The three-year BDBNs have a catch-all clause that allows a trustee to do anything permitted or required by the super and tax laws. However, there is a split view among lawyers regarding the use of this type of nomination in an SMSF and many say that the fund's trust deed needs to specifically allow for their use.

In relation to non-lapsing BDBNs, some lawyers will recommend that a super fund’s trust deed include express provision for the nomination to become invalid upon the occurrence of certain events after the BDBN is executed, such as marriage, divorce and a nominated beneficiary predeceasing the member.

It’s possible to draft or amend an SMSF trust deed so that a BDBN can provide for future contingencies, similar to what many people do with their will. In some cases, it might be necessary to specifically detail in the trust deed who is to receive a death benefit. These are sometimes referred to as “embedded BDBNs” because the beneficiary is specifically mentioned in the fund’s governing rules.

If you want your death benefit paid to your legal personal representative, then it shouldn’t be paid until that representative has been formally appointed by the court (either via the granting of probate or the issuance of letters of administration).

One area of super fund death benefits that is often overlooked is the area of notional estates.  A notional estate in some cases may be bigger that the “actual estate” of the deceased. For instance, say a parent favours one child over another and transfers a residential property to that child before their death – this asset has essentially been removed from their actual estate. The concept of a notional estate is relevant to superannuation because super death benefits also fall outside the actual estate.

Family provisions laws operating in New South Wales potentially open up an avenue to challenge a BDBN by taking the notional estate into consideration and, in some cases, these assets can be brought back into the estate within a certain timeframe. These laws are meant to be applied across all states and territories but the other jurisdictions don’t appear keen to enact them.

Insurance through an administration platform

If you've purchased insurance in your super fund through an administration platform, you’ll be dealing with the administration platform who then deals with the life insurer. Since you won’t be dealing with the insurer directly, you might find the administration platform staff doesn’t know why certain document requests are being made by an insurer and why there are delays in assessing a claim.

When a claim is paid, both the life insurer and the administrator will want a release form signed by the trustees.

Insurance from a life insurer

Upon notice of death, a life insurer must see the death certificate. Depending upon the cause of death, a life insurer may want further evidence, such as medical records.

Typically, the life insurer will be looking to see if all relevant information was disclosed to it when the policy was taken out. This will include all relevant medical information and, if relevant, dangerous employment activities or recreational pursuits. Also, the higher the level of insurance, the longer it will take the insurer to make an assessment. You'll need to do all you can to ensure that a life company can make a quick decision to pay out a death insurance claim.

Paying proceeds out of the super fund

There are no hard and fast rules for SMSF trustees when paying out a death benefit. However, given super funds are trusts, it's important to remember that any of the fund's trustees must act in the best interests of the trust’s beneficiaries and treat all of these beneficiaries the same.

The first job for a trustee is to determine if any binding nomination completed by the deceased member is valid, both in terms of the trust deed and the superannuation law. If the nomination is valid, then the trustee should follow procedures to pay the benefit in accordance with that nomination.

If the nomination is invalid (or the nomination isn’t binding on the trustee), then the trustee should follow a process to determine how the benefit should be paid.

SMSF beneficiaries who aren’t happy with the decision and who wish to object could try a number of complaint mechanisms, such as initiating court proceedings.