Retirement planning can be complex. Estate planning can also be complex. Legislative change over time has continued to affect these important areas. It is no surprise, therefore, that the interaction between retirement and estate planning can be particularly complex. That said, ensuring that income stream death benefits are directed in accordance with their intentions is a critical consideration for many clients.
In this article we discuss the various mechanisms available for clients to direct super income stream death benefits, remove some of the complexity around this element of retirement and estate planning and examine ways to provide clients with greater certainty regarding the direction of such benefits.
Super death benefits
In the event of a member passing away, a super death benefit must be cashed as soon as practicable, as the death of a member is a compulsory cashing event. This means that any remaining super must be paid in the form of a lump sum and/or retirement phase income stream, subject to any Transfer Balance Cap (TBC) considerations.
Superannuation death benefits and the Transfer Balance Cap
From 1 July 2017 where a super death benefit is paid out of the superannuation system as a lump sum payment there is no transfer balance credit to the recipient’s transfer balance account. However, where a superannuation death benefit is paid to an eligible dependant as a superannuation retirement phase income stream, the purchase price of the income stream will generally be credited to the dependant’s transfer balance account at the time of commencement. Where a super death benefit from an income stream is paid as a reversionary retirement phase income stream the value of the income stream at the date of death of the original recipient is counted as a credit to the reversionary recipient’s transfer balance account 12 months after the date of death.
A child recipient of a superannuation retirement phase income stream death benefit from a parent will be entitled to a modified TBC (determined by reference to the value of the parent’s or the general TBC and the child’s share of the deceased’s superannuation interests).
From 1 July 2017 it is possible for dependent beneficiaries receiving a death benefit income stream (subject to the conditions of the super income stream) to rollover that death benefit to another retirement phase income stream. Prior to that date, rollovers were only permissible for immediate cashing or outside the 3/6month ‘prescribed’ death benefit period.
Since 1 July 2017, it is not possible to rollback a super death benefit income stream to:
- the accumulation phase of super;
- commence a transition to retirement income stream where the recipient has not otherwise met a condition of release; or
- an income stream (such as a deferred lifetime annuity) in the deferral phase where the recipient has not otherwise met a condition of release.
Further, death benefit income streams cannot be rolled back to super, used to commence an income stream not in the retirement phase or be combined with other superannuation benefits that are not death benefit income streams.
How, and to whom, a super death benefit is paid depends on several factors, including:
- the type of beneficiary nomination in place at the time of death;
- whether an income stream (if applicable) is reversionary; and
- provisions of the trust deed of the fund or any contractual obligations (if applicable).
Whilst a member is in the accumulation phase, they are generally given the option of making a binding or non-binding beneficiary nomination. When starting a retirement income stream, the option to make a reversionary nomination is generally available. These nomination types are discussed in further detail throughout this article.
Where a valid binding nomination is in place at time of death, super law restricts the trustee from exercising discretion or investigating other potential beneficiaries.
Binding nomination requirements may vary depending on the fund’s trust deed and governing rules, but typically must be given to the trustee on a notice signed by the member with the signature witnessed by two people aged 18 or over (other than the nominated beneficiaries). Specific to lapsing binding nominations, the nomination lapses within three years and generally reverts to ‘non-binding’ where not renewed (though super funds may have different arrangements upon lapse and this should be confirmed with the specific fund). Non-lapsing binding nominations remain in place unless updated or cancelled by the member.
Some clients will lose legal capacity while alive and in such circumstances, it is important to consider how best to ensure nominations remain valid and up-to-date. Having an enduring power of attorney (EPOA) in place may assist in these circumstances.
As differing industry practices exist around accepting a nomination under an EPOA (some funds will not accept such a nomination) advisers providing advice to retirees in this area should confirm if a client’s fund will accept such a nomination.
Non-lapsing binding nominations can help with ageing members who are living longer and potentially losing capacity to sign documents. This nomination type can be used when payment to a nominated beneficiary, beneficiaries and/or the estate are a client’s primary concern. Importantly, binding nominations (lapsing and non-lapsing) generally do not bind the trustee as to the form of super death benefit made. At the time of death, the super death benefit may be paid as a lump sum, income stream or combination.
Members may also opt to make a non-binding nomination. Although this nomination type is not binding on the trustee, the trustee may take into consideration the member’s wishes when planning as to whom the benefit is paid. A trustee is generally obliged to undertake a claims-staking process, whereby they identify and contact valid beneficiaries to advise how they intend to distribute the death benefit giving them a period in which to object. This process can in some cases lead to a delay in releasing funds.
With death benefit complaints making up the second-largest category of complaints for the Superannuation Complaints Tribunal (SCT) during 2016/171 , it is important that clients are aware an eligible beneficiary may contest super death benefit outcomes by approaching the SCT. Of note, whilst the SCT does not deal with trustees of a self-managed superannuation fund, the decision regarding the appropriate nomination type is still an area which needs to be carefully considered.
Depending on the type of income stream and features available, members may also have the option of a reversionary nomination. This allows the member to nominate a limited category of SIS dependants (refer to Table 1) whom automatically continue an income stream in the event of a member’s death. Whilst providing a high degree of certainty, the criteria to make, remove or change this nomination type can differ between product providers.
When using a reversionary nomination and the income stream is not an account-based pension, for example a lifetime annuity, the social security deduction amount is assessed under the return of capital rules. Meaning that the deduction amount is calculated by dividing the purchase price less withdrawals (if any) by the investor’s life expectancy (or that of their spouse if they are a reversionary beneficiary with a longer life expectancy).
Where no valid nomination is in place, or in instances where no nomination has been made, trustee discretion in relation to death benefit payments will generally apply. Trustees are generally required to undergo a claims-staking process (like it would in the case of a non- binding nomination) to determine how the super death benefit is to be paid.
Some trustees may choose to release funds in line with a default arrangement, as noted in the fund’s trust deed and governing rules, including the product disclosure statement. For example, where there is no nomination in place, the trustee may automatically pay to the estate.
A nominated beneficiary needs to be a super dependant to be valid
A superannuation death benefit can be paid to an eligible superannuation dependant as described below, the estate or a combination of these.
The Superannuation Industry (Supervision) Act 1993 (‘SIS Act’) lists three main categories of persons who may be classified as a dependant of a deceased member (‘SIS dependant’):
1. a spouse (whether of same or opposite sex) of the deceased, which includes a de facto partner or a legally registered marriage or civil union;
2. a child (of any age) of the deceased or the deceased’s spouse; and
3. any person with whom the deceased member had an interdependency relationship. Which the SIS Act, defines as two people whom:
a) have a close personal relationship; and
b) live together; and
c) one or each of them provides the other with financial support; and
d) one or each of them provides the other with domestic support and personal care.
In addition, two persons (whether or not related by family) also have an interdependency relationship if they have a close personal relationship and either or both of them suffer from a physical, intellectual or psychiatric disability.
As the definition of dependant in the SIS Act is an ‘inclusive’ definition, other kinds of dependency, such as financial dependency, can also be considered.
Only in cases where ‘the trustee has not, after making reasonable enquires, found either a legal personal representative or a dependant’, super death benefits can be paid to another individual, such as a non-dependant.
Lump sum or income stream
While the beneficiary nomination type, as well as who should be nominated, are important considerations, another key decision for clients is the form of the death benefit payable.
For instance, where it is important the death benefit be paid as an income stream, it is crucial that a valid beneficiary is nominated. Alternatively, where a lump sum is to be paid to the estate of the deceased, it is important that the will is reviewed to ensure funds are distributed as intended.
On death of a member, the trustee may liaise with the eligible dependant to determine if they are a death benefits dependant, thus eligible to be paid as a lump sum, income stream or combination thereof. A summary of death benefit payment options based on beneficiary type is summarised in Table 1.
Table 1: Death benefit payment options
|SIS dependant||Death benefits dependant||Lump sum||Income stream|
|Spouse (including same-sex and de facto)||Yes||Yes||Yes|
|Child under 18 (including an ex-nuptial, adopted or step-child of the person and a child of the person’s spouse)||Yes||Yes||Yes|
|Child over age 18 and financially independent
|Child over age 18 and under 25, financially dependent||Yes||Yes||Yes|
|Disabled child, ‘Disability Services Act 1986 (Cth) s8(1) (Austl)’, (no age restriction)||Yes||Yes||Yes|
|Person with whom an interdependent relationship existed||Yes||Yes||Yes|
|Financially dependent person at the time of death
When it comes to selecting a beneficiary, clients should be made aware of the different tax treatment that applies to super death benefits depending on whether they are a death benefits dependant or not at the time of death, as described in Table 2.
Table 2: Tax of super death benefit payments
|Death benefit beneficiary||Lump sum||Income stream|
|Death benefits dependant
||Payment tax free||Tax free if deceased or beneficiary aged 60 or over. Any untaxed amount is taxed at marginal tax rates (MTR) with a rebate of 10% (subject to the TBC).|
|Other cases||No tax is payable on the tax- free component. Up to 15% on the taxable element and 30% on the untaxed element.||Not applicable
Notably, in the situation where a member of the Australian Defence Force or police force dies in the line of duty, the lump sum super death benefit is also tax free for someone who is not a death benefits dependant.
Also, where children under age 25 start receiving a death benefit income stream after 1 July 2007, they must stop the income stream and take the remaining benefit as a lump sum on or before the date they turn 25 with the lump sum tax free.
Ensuring that income stream death benefits are directed in accordance with their intentions is a critical consideration for many clients.
An understanding of the complexities surrounding this area can deliver certainty to clients ensuring testamentary intentions are realised.
1Source: Superannuation Complaints Tribunal Annual Report 2016/17.