What happens to your super when you die?

PUBLISHED 13 Sep 2020

When someone passes away with funds still remaining in their superannuation account, what happens next? While in most cases, the fund’s contents are paid to a designated beneficiary, potentially accompanied by an insurance payment, there are complex cases that can arise in unique circumstances. Sometimes, these result in drawn-out dispute processes, which can be very emotionally taxing for families already suffering a loss.

Breaking down the process behind superannuation fund death benefits can help you ensure arrangements are in place to pass on your super to the intended person or people in the event of your death before the balance is withdrawn. This information is also important to consider if you are wondering whether a superannuation death benefit fund payment in your family is worth challenging.

What is the superannuation death benefit?

Starting at the beginning, the death benefit is a process by which the super provider pays the remaining balance of the super to a surviving beneficiary if the holder passes away. As the Australian Taxation Office specifies, the term “super death benefit” applies to all such payments after the owner of the super has passed away.

This is all relatively straightforward and should occur “as soon as possible” according to the ATO’s rules for funds. Potential issues arise in the matters of determining who the beneficiary or beneficiaries of the payments should be. Did the deceased select a dependent beneficiary to receive the funds, and if so, was the process carried out in the correct manner? Cases, where there is ambiguity around those points, may lead to dispute cases and resulting legal action.

Who should be awarded the death benefit?

The death benefit is paid to people who fit within a limited number of categories. There are dependents, who are eligible to receive their payments as either an income stream or a lump sum, as well as non-dependent beneficiaries, who can only receive the money all at once, as a lump sum. There is a third option: The payment may go to the deceased estate under the care of a trustee – this happens when there is not a binding nomination for a recipient.

What is a binding nomination?

A binding nomination is the selection of a recipient for money from a super if the holder dies with value still in the account. A superannuation fund’s members have the right to choose a beneficiary, if the individual rules of their supers allow it, according to the ATO. These nominations can lapse. Unless the member updates the nomination every three years, the binding nomination will expire every three years, which could cause confusion in the event of an unexpected, premature death.

There is a significant difference between a binding nomination and a non-binding version. A binding death benefit nomination, where allowed, is the simplest form of arranging payment when someone dies. In this case, a dependent or multiple dependents will receive the money, in accordance with the member’s wishes. The ATO notes that the holder of the super may also nominate a legal personal representative, the executor of their estate, to receive the money.

A non-binding nomination is different. When one of these is in effect, the trustee of the provider has more authority and can decide how to pay the benefits. The payment can be made as stipulated in the nomination, or it can be passed along to the executor of the state for distribution to the family. This latter option happens when the deceased has left a will that calls for the disbursement of super death benefits.

What happens when there is no nomination?

As with a non-binding nomination, the ATO explains that the trustee of the super takes on more responsibility in cases when a person has not nominated anyone to receive the death benefit. This trustee is allowed to use personal judgment to determine which of the deceased’s financial dependents should be paid.

Also echoing the process behind a non-binding nomination, the trustee can release the funds to the executor of the estate, who will then distribute them according to instructions left in the super member’s will. No matter which of the scenarios plays out, however, there is an important distinction between dependent and non-dependent recipients of super fund death benefits.

Who are (and are not) legally dependants?

It’s important to know the legal definition of dependents, whether you are the one setting up a nomination for a person to receive your super at the time of your death or a person considering contesting a claim on a super death benefit. While some of the connections that mark someone as a dependent are very clear and straightforward, others rely on the concept known as “interdependent relationships,” which covers domestic and financial support.

In the simplest terms, and as defined by superannuation law, a dependent is:

  • The spouse or de facto spouse of the deceased, including same-sex partners
  • A child, stepchild or adopted child of the person who has died, with no restrictions on that child’s age (though in the case of payments to minors, the money may go into a trust)
  • An individual who received financial support from the person as part of an interdependent relationship

What defines an interdependent relationship?

An interdependent is someone who had a close personal relationship with the deceased at the time of death. In typical cases, this will mean the two lived together, while one member of the pair provided domestic support and personal care for the other, or they both provided it for each other. Furthermore, there should also have existed a financial support relationship between the two, with either one or both providing money.

What if you want to leave your money to someone who is not your dependent?

While dependents cover a wide range of family members and other relationship statuses, a person may decide to leave the contents of a super to someone who does not fit that definition under superannuation law. In these cases, the ATO recommends using the option to leave the money in the care of the executor of the estate, who will distribute the money according to the instructions left in the will.

What happens when a will seems to contradict a binding nomination?

It’s important to note what happens when there is a potential conflict between a person’s will and the contents of a binding nomination for disbursement of the super death benefit. In cases when the superannuation fund pays the estate, the administrator or executor of that estate may need to apply for a grant to receive the money. The money from a super fund does not automatically enter the estate, and if there is a valid binding nomination, that money will be paid according to the document, even if the text of the deceased’s will says the whole estate should go to someone not named in the nomination.

How are super death benefits paid out and taxed?

While payments of super death benefits must be made as one-time lump sums if the beneficiary is not a dependent, financial dependents have the option of receiving a super income stream instead. An income stream that goes to a dependent child of the deceased comes with special rules, according to the ATO. In these cases, the income stream must stop on or before the child’s 25th birthday, with the remainder paid out as a tax-free lump sum. This does not apply if the child has a permanent disability. Income streams already being paid to superannuation members who die cease and are paid as a lump sum, unless the fund has rules that allow them to be passed to dependents.

Lump sums paid to dependents come all at once and are not taxed. There are special rules for payments to non-dependents, wherein fund personnel will have to calculate which parts of the benefit are taxable and which are not. Furthermore, a super income stream which is commuted into a lump sum on the super member’s death is also portioned out, with a part of the money taxed and the other part paid out tax-free.

What do I do if I want to dispute a super death benefit?

If you believe you are entitled to the super death benefit of someone who has recently passed away but are not in line to receive it, you can make a challenge, but you have to move quickly. Due to the instructions to make these payments as quickly as possible, the time limit to request a review by the superannuation fund is 28 days. You should be prepared with documents to support your claim that you have had a close relationship with the deceased and/or were dependent on them.

You can contact the expert solicitors at Gerard Malouf and Partners to help you in your case as you pursue what you are owed. With our long experience in settling superannuation dispute cases, we can provide answers to your questions. Call us on 1800 004 878 or email your enquiry to get started.

Call us now on 1800 004 878 to book a free appointment with one of my compensation experts, or email your enquiry.