Legal Tip 438: Should Super Death Benefits Pass to the Estate as a Default?

Legal Tip 438: Should Super Death Benefits Pass to the Estate as a Default?


When a super member dies their superannuation death benefits (what they have in super, often with life insurance) will have to be paid out. At the moment it can only be paid directly to a dependant or to the deceased estate. It’s the trustee of the fund who decides – subject to any Binding Death Benefit Nomination or BDBN in place.

There are disadvantages with this. It takes time for the trustees for find all relevant dependants and then make a decision. There may be disputes between the beneficiaries as to who is more deserving. A BDBN may be defective or have lapsed etc too.

The alternative is to have the law changes so that it passes to the estate, but this can be modified by any valid BDBN that the testator leaves.


The Law Council of Australia has made such a proposal. Which can be found at:

https://media.licdn.com/dms/documen...t=j4UtI5eApFE--T0gdkDa7i8qui0S7FICq8UcsCwfVVc


However, they didn’t mention the taxation aspects. If paid in a a general estate rather than directly to a dependant, it could result in more taxation being payable unless the will is drafted with a superannuation proceeds trust in place.

 

SMSFs may vastly complicate this issue or simplify it. The surviving trustee must carefully consider the nature of the deceased instructions prior to death. It is very wise to seek legal advice if there is no such instruction. There was a high profile case recently where the surviving wife paid the death benefit to herself rather than the estate which would have enhanced benefits to others. they sued and won. She wore the court costs which were significant

We handle a lot of smsfs and when death occurs we generally ensure the trustee seeks legal advice prior to acting to avoid either of us being sued. Litigation over super benefits is a money maker for no win lawyers eager to take on anyone with benefits or PI cover

 

what would make a BDBN defective/lapse? isn't it simply a checkbox with a name and no expiry date in the superannuation system (or a form for those that still use paper)?

edit: nvmd, i see that the form has both lapsing and non-lapsing versions

 

Might not be witnessed properly, might not be on an approved form (depends on the fund), could be invalid beneficiaries - there's a range of reasons.

I don't like the idea of it defaulting into the estate but I do see the merits of it to avid long drawn out complaints with super funds - but then it can automatically create some bad tax outcomes.

I'd personally like to see funds be more proactive to members encouraging people to create BDBNs - saves everyone a lot of stress.

 

I think there was a challenge to a BDBN based on capacity recently too.

 

Loads of defects can be evident. eg A BDBN may stipulate a share of the balance to a few people. One may not be a super dependant eg a adult child. A person may have died. May even be abinding nomination with a time period allowing it to lapse. Trustee can then pass it all to one who is eligible (eg spouse) or all to the estate as they do get to choose. If the will was drafted assuming super wasnt going to the estate loads of issues can affect this.

And how binding is "binding""?

I would prefer a system that can be tied to portability eg the one account for life concept. Then allow the nomination via the ATO and make all such elections to be non-lapsing. However many older people dont use technology. And a nomination can become invalid eg the person divorces or spouse dies etc.

Its ironic that is someone had a box of gold under their bed they think of their will but despite being told endlessly many ignore super like its a passbook someone can present and draw all the funds after death.