Superannuation death benefits and the estate

A superannuation fund is a trust. The member's account is held by the trustee, not owned outright by the member. When the member dies, the trustee must pay the death benefit in accordance with the fund's trust deed and governing rules and the superannuation law, principally the Superannuation Industry (Supervision) Act 1993 (Cth) and its regulations.

The ATO's guidance on paying superannuation death benefits explains that a death benefit is generally paid to a dependant or to the trustee of the deceased estate, and that the form of the benefit and who receives it depend on the fund's governing rules and the relevant regulations.

These are general categories. Each fund's rules differ, including about how a nomination must be made, whether it lapses, and how the trustee exercises any discretion.

A binding death benefit nomination is a direction by the member about who is to receive the benefit. Whether a nomination is binding depends on whether it was made in the form and manner the fund's rules and superannuation law require, whether it has lapsed or been revoked, and whether each nominated person is someone to whom the benefit may lawfully be paid.

A nomination that fails any requirement may not bind the trustee. The trustee may then have to decide the matter under the fund's rules. It is common for an executor to ask the fund what nomination it holds and whether it regards the nomination as valid.

Who can be nominated

Under superannuation law, a death benefit may generally be paid only to the member's dependants (as defined for super purposes) or to their legal personal representative. The definitions are found in the super legislation and fund rules and should be read directly. A nomination of someone outside the permitted classes may be ineffective.

If the benefit is paid to the legal personal representative, meaning the executor or administrator, it becomes an estate asset. It is then dealt with under the will or the intestacy rules, and may be available for estate debts and potentially for family provision claims.

Funds commonly require a grant of probate or administration before paying the legal personal representative. This can be a reason why a grant is needed even for an otherwise small estate. See when probate is required.

An executor should consider whether the estate has a claim to the benefit and should not overlook it simply because it is not listed as an estate asset. Equally, an executor should not assume the benefit will come to the estate.

A frequent source of confusion is that there are two different questions:

• who may receive a death benefit under superannuation law and the fund's rules; and
• how the benefit is taxed, which depends on whether the recipient is a death benefits dependant for tax purposes.

The two definitions overlap but are not identical. A person may be eligible to receive a benefit under super law but be a non-dependant for tax, and vice versa. For example, the ATO's material on taxation of super benefits explains that a super lump sum death benefit paid to a death benefit dependant is tax-free, while one paid to a non-dependant may be taxed; and that a benefit paid to the trustee of a deceased estate is taxed within the estate in the same way as if it had been paid directly to the beneficiary.

Many super accounts include life or total and permanent disability insurance. A life insurance benefit held through super is generally paid to the trustee and forms part of the super death benefit, following the same rules. Insurance held outside super, by contrast, is paid according to the policy's terms, which may name a beneficiary or pay the estate.

Disputes about super death benefits usually concern the trustee's decision: whether a nomination is valid, who was a dependant, or how the trustee exercised its discretion. These are generally dealt with through the fund's complaints process and the external complaint and review mechanisms available under super law, rather than through the probate process.

Whether a super benefit paid directly to a dependant can be taken into account in a Victorian family provision claim is a separate question that depends on the Act and the facts. See family provision risk for executors.

1. 1Notify the fundProvide the death certificate, or other evidence of death, and ask what the fund needs. Each fund has its own claim process.
2. 2Identify nominationsAsk whether there is a binding, non-lapsing or non-binding nomination, or a reversionary pension, and obtain copies.
3. 3Provide claimant informationPotential recipients usually provide evidence of their relationship with the deceased and, where relevant, financial dependency.
4. 4Trustee decisionThe trustee decides, under the fund's governing rules and the law, who is paid, in what proportions and in what form.
5. 5Review and complaintA person dissatisfied with the decision can usually use the fund's internal complaints process and, if unresolved, the external dispute resolution scheme, subject to time limits.

Whether a nomination binds the trustee depends on the type of nomination, whether it met the formal requirements when made, whether it has lapsed and whether the nominated person was eligible to receive the benefit. The Superannuation Industry (Supervision) Act 1993 (Cth), the regulations and the fund's trust deed all matter. If there is no binding nomination, or it is invalid, the trustee generally has a discretion, exercised within the fund's rules, to pay dependants, the legal personal representative or a combination.

A payment to the legal personal representative brings the benefit into the estate, where it is dealt with under the will or intestacy rules. That can expose it to estate debts and potentially to family provision claims, which is one reason the pathway matters.

Insurance and self-managed funds

Life or total and permanent disability cover held through super is usually paid to the fund and then forms part of the death benefit. In a self-managed super fund, the remaining trustees or directors make the decision, and questions can arise about who controls the fund after death, conflicts where a trustee is also a potential recipient, and whether the deed's requirements were met. These issues are fund-specific and need individual advice.

Super law and tax law use different definitions. Someone may be eligible to receive a benefit but still pay tax on it.

This table is a high-level summary. The precise definitions, including how financial dependency and interdependency are established, should be checked in the legislation for the particular facts.

• Assuming a will controls super automatically.
• Assuming super is always paid to the estate, or never paid to it.
• Assuming a nomination is binding without checking the fund's rules.
• Confusing eligibility to receive a benefit with tax dependency.
• Overlooking insurance held inside super.
• Distributing the estate without knowing whether a super benefit will be paid to it.

We can help an executor identify super accounts, request information about nominations and the fund's position, and consider whether the estate has a claim to the benefit. Where tax advice is needed on how a benefit will be taxed, that should be obtained from a registered tax adviser.

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