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Drafting a will? Super!

Feature Articles

Cite as: (2007) 81(3) LIJ, p. 48

When it comes to drafting a will, solicitors need to be aware that superannuation death benefits do not usually form part of the estate.

By Marita Wall

Solicitors need to be aware that superannuation death benefits do not usually form part of the estate.
By Marita Wall

Often a large sum is payable from a superannuation fund when a person dies, particularly as many people have life insurance through their superannuation fund.

However, many practitioners are surprised to learn that death benefits from superannuation funds do not by law form part of the estate. They are not automatically distributed according to the deceased person’s will or in accordance with any nomination they have made to the superannuation fund trustee.

Who receives the superannuation benefit when a member dies?

Usually it is up to the trustee of the fund to determine to whom the benefit should be paid (although the Superannuation Industry (Supervision) Act 1993 (Cth) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS) restrict this discretion).[1] Generally, death benefits can only be paid from a superannuation fund to:

  • the deceased’s spouse (including a de facto);
  • the deceased’s child (of any age,[2] including adopted, step-children and ex-nuptial children);
  • a person who was in an interdependency relationship with the deceased (including relationships such as same-sex partnerships and two elderly sisters living together);[3]
  • a person who was financially dependent on the deceased; and/or
  • the deceased’s estate;

in such proportions as the trustee determines.

Only if the trustee, after making reasonable inquiries, has not found either a legal personal representative or a dependant of the deceased can payment be made to another person.[4]

When a deceased has nominated a preferred beneficiary before their death, the trustee will consider the nomination but is not bound by it, except in the case of a binding nomination (see “Binding nominations” below).

It is beyond the scope of this article to examine how trustees exercise their discretion with respect to distribution of death benefits among dependants. However, in my experience, the following principles generally apply:

  • trustees consider the wishes of the deceased, the financial circumstances and needs of the potential beneficiaries and the nature of the relationship between the beneficiaries and the deceased;
  • trustees are likely to consider who would be most likely to have continued to receive the income of the deceased had they not died;
  • trustees also generally take into account who would have been likely to participate in the benefit with the deceased had they lived to retirement;
  • financially independent adult children are unlikely to be included in a superannuation distribution where there are other dependants who are in a position of financial need;
  • it is not the role of superannuation to compensate for inequities that occurred during the life of a deceased member (for instance, where the deceased failed to pay maintenance during the childhood of a claimant who is now an adult); and
  • it is also not the function of superannuation to act as a cheap alternative to a testator’s family maintenance (TFM) claim. In other words, death benefits are not distributed to satisfy potential dependants who feel they were treated inadequately under the deceased’s will.

If a deceased had life insurance cover through their superannuation fund, the proceeds of the life policy are paid to the trustee of the superannuation fund and form part of the superannuation benefit. They are therefore distributed in accordance with the above principles.

When is superannuation paid to the estate?

Superannuation death benefits can only be paid to the estate of a deceased member when:

  • the superannuation fund’s trust deed stipulates that payments on death must go to the estate (which is not a common provision);
  • the superannuation fund’s trust deed gives the superannuation fund trustee a discretion with respect to payment of the death benefit and the trustee exercises this discretion to pay to the estate; or
  • the fund allows members to make binding nominations and a member has nominated his or her estate.

Although the first of these three situations is self-explanatory, the second and third require explanation.

Discretionary payments to the estate

Superannuation fund trust deeds usually give the trustee a discretion with respect to distribution of death benefits.

If a person dies without leaving any dependants, the superannuation fund trustee will have no choice but to pay the death benefit to the legal personal representative (if any). However, if there are dependants, trustees usually distribute the death benefit directly to the dependants rather than to the estate for the following reasons:

  • The estate may be insolvent or subject to litigation. In these situations the benefit might be lost to creditors or exhausted by the costs of litigation.
  • It potentially contravenes the trust law duties to give real and genuine considerations[5] and to exercise powers for a proper purpose,[6] particularly if the trustee has decided to pay the death benefit to the legal personal representative to avoid deciding between potential dependants.
  • Even if those who benefit under the will are the same as those dependants who could have received the benefit directly from the superannuation fund, if the death benefit is paid via the estate the amount of the benefit could be reduced if the estate is insolvent. Payments directly from a superannuation fund are not generally available to creditors of the estate.
  • If those who benefit under the will are the same as those dependants who could have received the benefit directly from the superannuation fund and if the death benefit is paid via the estate, there is another basis for complaint by the beneficiaries. If there are no other assets in the estate, they are disadvantaged by the costs and delay involved in obtaining probate or letters of administration. If the payment is made directly to them as dependants, these costs and the time required to obtain a grant would be unnecessary.

There is generally no disadvantage from a tax perspective in paying a death benefit to a dependant via a deceased member’s estate as opposed to paying it to the dependant directly.[7] However, the above concerns mean that trustees usually prefer to pay death benefits directly to dependants to minimise their exposure to review by the courts or the Superannuation Complaints Tribunal.

Binding nominations

As previously stated, most superannuation fund trust deeds give the trustee a discretion with respect to the beneficiaries of death benefits (within the statutory limitations previously outlined). Often when they join a fund, the trustee will provide members with a nomination form, to allow them to nominate their preferred beneficiaries. Although the trustee will take such a valid nomination into account when exercising its discretion, it will not be bound to follow it. Such nominations are called “non-binding nominations”.

This contrasts with the situation where a trust deed provides for “binding nominations”. As the name suggests, such nominations are binding on the trustee, provided they are valid (for instance, they are updated every three years – unless the fund is a self-managed superannuation fund – and only nominate dependants).[8]

While binding nominations provide certainty, they can produce results that are unfair or undesirable from the deceased’s point of view, particularly if they are not up to date (e.g. a deceased separates, has a child or marries). For these reasons, binding nominations have not been as popular as expected when they were introduced in 1999.

Most superannuation funds still give the trustee a discretion with respect to distribution of death benefits, rather than adopting binding nominations.

Is a provision in a will about distribution of superannuation therefore ignored?

No. A member’s wishes are relevant but not determinative for a superannuation fund trustee when deciding how to carve up a superannuation death benefit (other than in the three situations outlined in “When is superannuation paid to the estate?” above).

The member’s will can be a helpful guide as to their wishes regarding the distribution of their assets, although wills do not always reflect members’ wishes as to their superannuation. Many people die without a recent will, and many make a simple will without taking advice about the treatment of their superannuation.

When drafting a will, it is appropriate for solicitors to consider how the testator wishes their superannuation to be dealt with, as the trustee might exercise its discretion to pay the death benefit to the estate. However, it should be borne in mind that superannuation benefits do not usually form part of the estate and are usually paid directly to dependants.

Must probate or letters of administration be obtained?

Difficulties often arise if a superannuation fund trustee wants to pay benefits to the legal personal representative and there are no other assets in the estate. Potential beneficiaries and potential legal personal representatives regularly ask superannuation fund trustees to waive the requirement that they obtain probate or letters of administration, due to the costs and delay involved.

Most trustees will deal with the person nominated as executor under the will or the person who is best placed to obtain a grant of letters of administration, even before probate or letters of administration have been granted. However, generally trustees insist that the legal personal representative obtain a grant of probate/letters of administration before they will pay the benefit. This is because the SIS specifies that death benefits can generally only be paid to a dependant or the legal personal representative.

What if there is a TFM claim against the estate?

As superannuation does not usually form part of a member’s estate, those claiming under the TFM provisions in the various jurisdictions cannot usually include superannuation benefits in such a claim.[9]

It may, however, be relevant for the superannuation fund trustee to be made aware of claims against a deceased member’s estate as the financial circumstances of dependants are relevant to a trustee when deciding to whom a benefit should be paid. For instance, a trustee might consider that a spouse has been adequately provided for under the will and decide to pay the whole of the superannuation fund death benefit to children from a former marriage. A TFM claim by one of those children could impact on the certainty of the financial security of the spouse.

Conclusion

When drafting a will, solicitors should bear the following in mind:

  • Superannuation death benefits do not automatically form part of the estate. Although a provision in a will can be of assistance in indicating a person’s wishes, it is usually not binding on the trustee of a superannuation fund.
  • A superannuation fund trustee might exercise its discretion to pay the death benefit to the estate, even though it would not generally be bound to do so.
  • Clients should indicate their wishes with respect to the distribution of their superannuation by updating their nomination of beneficiary form with the superannuation fund. This is essential if the fund offers binding nominations, but is also important for non-binding nominations.
  • Updating nomination forms is particularly important if a client experiences a change in circumstances, such as a divorce or breakdown in a de facto or other relationship or if the client has a child.
  • Recent changes to the law mean that those in same-sex relationships (and other interdependency relationships) can be eligible to receive a superannuation death benefit. Affected clients should be advised to update their nomination forms.

With the latest Budget announcements, it is anticipated that superannuation will become the preferred investment for Australians. As the amount of money in superannuation increases, so too does the risk of litigation in respect of superannuation death benefits. It is already the second most common basis of dispute in the Superannuation Complaints Tribunal.[10]

It is vitally important that legal advisers are aware of the issues that arise in relation to superannuation death benefits in order to minimise the confusion and angst of clients, maximise their benefits and minimise the risks to the adviser. Solicitors preparing wills and estate plans ignore superannuation at their peril.


MARITA WALL is a barrister and part-time member of the Superannuation Complaints Tribunal.


[1] SIS s62 (the sole purposes test) and SIS reg 6.22.

[2] This differs from the definition of dependant in s27A of the Income Tax Assessment Act 1936 (Cth), which generally only applies to children under 18.

[3] SIS s10A.

[4] SIS reg 6.22(3).

[5] Re Gulbenkian’s Settlement [1970] AC 508, 518; Vidovic v Email Superannuation Pty Ltd, unreported, 3 March 1995, NSW Supreme Court, Bryson J, 11.

[6] Cowan v Scargill [1985] Ch 270; Hillsdown Holdings PLC v The Pension Ombudsman [1996] PLR 427, English High Court of Justice.

[7] By virtue of s27AAA(3) of the Income Tax Assessment Act 1936 (Cth), which provides that the amount that would otherwise be an eligible termination payment in relation to the deceased taxpayer is to be reduced by such amount (if any) as the Commissioner considers appropriate having regard to the extent to which dependants of the deceased taxpayer may reasonably be expected to benefit from the estate.

[8] SIS s59A(1A) and SIS reg 6.17A.

[9] Subject to bankruptcy avoidance legislation in various jurisdictions.

[10] The Superannuation Complaints Tribunal does not have jurisdiction in relation to self-managed superannuation funds, although it can determine matters relating to small APRA [Australian Prudential Regulation Authority] funds.

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