Have you ever considered what would become of your super in the event of your sudden absence? While it’s not a pleasant thought, from a financial standpoint, it’s important to acknowledge. Understanding the distribution of your superannuation after death is vital for robust financial planning, given the many intricacies involved in the process.
At First Financial, we offer our clients comprehensive guidance on various aspects of financial planning and wealth building, including superannuation and optimal wealth transfer strategies. We also provide insights into the fate of your funds after your passing, exploring beneficiary options and tax implications.
Understanding superannuation distribution
As soon as practical after your passing, the trustee of your superannuation fund has the obligation to distribute your benefits. This process involves determining eligible beneficiaries, how the benefits will be paid out and the associated tax implications.
Under Australian taxation law, your superannuation can only be paid to someone known as a death benefit dependant. This includes a spouse or de facto spouse, former spouse or former de facto spouse, children under the age of 18, a person financially dependent on you or someone you are in an interdependency relationship with.
Only your spouse or child under the age of 18 can be paid a pension income stream, a lump sum, or both. Anyone else can only be paid a lump sum.
The tax implications
Taxation plays a significant role in superannuation distribution, affecting the amount received by beneficiaries. The tax treatment of super benefits depends on various factors, including the age of the deceased member, the age of the beneficiary, and whether the benefit is paid as a lump sum or pension.
Taxes for beneficiaries depend on whether they’re considered tax-dependent. If they are, they receive the money tax-free if paid as a lump sum. For instance, your spouse, former spouse (if eligible), and children under 18 usually receive it without tax. However, if a child is over 18, they may face a 17% tax on part of the money. For those who aren’t tax dependents, the tax treatment may differ.
The tax implications of receiving a death benefit pension depend on the ages of the deceased and the beneficiary. If either party is over 60, the entire benefit is typically received tax-free, except for some untaxed elements and defined benefit funds. However, if both parties are under 60, the tax treatment becomes more complex. While the tax-free component remains untaxed, the taxed portion is subject to the beneficiary’s marginal tax rate, with a 15% tax offset. Once the beneficiary reaches 60, the benefit is received tax-free.
What if you don’t have a spouse or children?
Parents typically cannot be designated as direct recipients of your superannuation benefits because they’re not considered dependents. However, if you have an interdependency relationship with them—such as living together or being financially reliant on them—you may be eligible to nominate them as beneficiaries based on this criterion.
But what if you don’t have a spouse, children, or any dependent who would qualify? If you are unable to nominate a specific beneficiary for your superannuation, you can elect to have your superannuation directed back to your estate, where they will join other assets such as your car, household items, property and bank savings. All of these assets are dispersed in accordance with the instructions outlined in your will.
The executor of your estate will oversee this process, ensuring it aligns with your wishes. That’s why it’s essential to regularly review and update your beneficiary nominations to ensure they accurately reflect your current circumstances and prevent complications and tension among family members.
Professional advice can help you optimise wealth transfer
While taxes on superannuation are inevitable in some scenarios, understanding the regulations governing their distribution upon your passing is vital to ensuring clarity on how your funds will be dispersed. Additionally, there are potential strategies to optimise wealth transfer options. For example, utilising the unused concessional contributions cap of a spouse or partner to supplement contributions to the surviving spouse’s superannuation account or establishing a testamentary trust to manage and distribute superannuation benefits for minor beneficiaries.
To navigate these complexities effectively, it’s advisable to seek professional guidance. A qualified financial adviser can evaluate your complete financial picture and suggest customised strategies for superannuation, investment, savings and estate planning.
At First Financial, we provide financial guidance and superannuation advice to our clients, personalised to their individual goals, objectives and family dynamics. While planning for unforeseen circumstances can be uncomfortable, it’s a crucial aspect of financial management that can’t be procrastinated.
Talk to the financial planning and superannuation experts
Knowing what happens to your superannuation upon your passing is essential in your estate planning efforts. With careful planning, you can ensure your assets are managed to provide for your loved ones.
At First Financial, our experienced financial advisers are dedicated to helping you achieve a secure retirement and navigate life’s uncertainties with confidence.
Contact us today to optimise your superannuation strategy.
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