Legal Tip 394: Superannuation proceeds trusts and Death of the Beneficiaries

Superannuation proceeds trusts are trusts that segregate super received into an estate upon death. The main reason for this is to avoid death benefits tax applying to it as if the super of a person is paid to the spouse and minor children of the deceased it will be tax free, but if it goes to others it would be taxable in part or full.


The super proceeds trust would generally be a discretionary trust with the trustee having discretion as to who can benefit from the income invested by the trust. But because the trust is a closed trust the beneficiaries are limited to those alive at the time of the death of the testator. Over time these beneficiaries will die off and at some point, there will be just one surviving beneficiary of the trust. This person will basically be the beneficial owner of the assets of the trust with the trustee perhaps having the right to retain income in the trust itself or distribution it to this sole beneficiary.

But what happens when this person dies?

The trust assets will generally form part of the estate of the last surviving beneficiary.


Example

Homer dies leaving 3 kids and a wife. One kid is over 18. Homer’s will says that any super death benefits being paid into his estate will be held under a separate superannuation proceeds testamentary discretionary trust. The death happens when Homer dies of Covid and his super is paid into the estate. There will be 3 beneficiaries of that super proceeds trust. Bart, Maggie and Marge, his 2 younger kids and wife. Lisa is over 18 at the time of the death so is not a beneficiary.

Later on Maggie and Marge die and Bart is the only beneficiary of that trust left. It still has $400,000 capital in it which is invested with all the income going to Bart as the only beneficiary.

Bart then dies in a boating accident.

The $400,000 in capital of the trust will now pass to Bart’s estate and via his will – hopefully into a testamentary discretionary trust.