Superannuation will grow to become one of your most valuable assets, so it makes sense that you should know what will happen to it when you die.
What is a Will & Why Does it Matter?
A Will is a legal document that clearly sets out your wishes for the distribution of your assets after your death.
If you die without a valid Will, you are said to have died intestate (from the latin word intestatus). Studies suggest that around 45% of Australians don’t have a valid Will.
If you do not have a valid Will your estate (i.e. your assets) will be administered by the Office of Trustee & Guardianship in your State or Territory.
The Office of Trustee & Guardianship will distribute your estate to certain relatives according to a pre-defined formula regardless of your intentions.
For an example of how this formula would apply to NSW, see HERE
Superannuation & Your Estate
Superannuation is a special trust structure for retirement purposes and therefore as it is held in trust, you do not own it personally. Sure it is your super fund, but you can only access it under defined circumstances.
As your superannuation is technically owned by a trust, it does not automatically form part of your estate when you die. To ensure superannuation is distributed to the right people when you die, you need to make a written direction to the trustee of the super fund.
What is a death benefit nomination?
A death benefit nomination is the term used to describe the written direction made to the trustee of your super fund to ensure your funds are distributed to the right people on your death.
What if I don’t make a nomination?
If you do not make a death benefit nomination, the Trustee of your super fund will make the decision on who gets your super when you die.
Sometimes this could result in unintended consequences, for example you super fund is left to your children instead of your wife, or vice versa.
In Stock (as Executor of the Will of Mandie, Deceased) v N.M. Superannuation Proprietary Limited  FCA 612, the deceased was a member of a public offer superfund. He was survived by his three adult children. As such, each of the children qualified as being a “dependant” under the terms of the trust deed for the superfund. The trust deed for the fund also allowed for the making of a BDBN [binding death benefit nomination], but the deceased had not done so.
The trustee of the fund decided to pay each of the adult children a third of the death benefits payable from the fund. However, one of the three children, his daughter, who was one of the executors of her father’s estate, sought to challenge this decision on the basis that the trustee should have instead paid all the death benefits to the legal personal representatives of her father’s estate. Under the father’s Will, the daughter would have received the bulk of the death benefits, with none of it going to her two brothers.
There was also evidence presented that the father had previously provided for his sons under a settlement agreement, and therefore presumably he intended that his daughter should be the main beneficiary of his super.
However, the trustee submitted that normally it would not pay a death benefit to the estate unless there are no dependants, or if there were such a direction in a binding death benefit nomination. Therefore the trustee was simply following its usual procedure in making its decision.
In the end, both the Superannuation Complaints Tribunal at first instance and the Federal Court of Australia on appeal held that the decision reached by the Trustee was fair and reasonable in the circumstances.
My super fund balance is small so why bother?
Sure you super fund may be small now, but it will grow over time.
In addition you probably have life insurance cover (death cover) in place in super (which would be paid out on your death) meaning your small super balance may instantly become significant on your death.
How do I make a death benefit nomination?
There are two types of death benefit nomination:
1. Non-Binding Death Benefit Nomination
When you first setup your super fund you will be asked to list potential beneficiaries.
As the extract from Australian Super shows, this nomination is a guide only and the Trustee is not bound by what you have listed when distributing super on your death.
2. Binding Death Benefit Nomination
To make sure that your wishes for your super are followed exactly you need to make binding death benefit nomination.
To do this you must fill out a physical form (provided by your super fund) and have it signed by yourself and two witnesses.
Lapsing & Non-Lapsing Nominations
Some super funds will offer the choice between lapsing and non-lapsing binding death benefit nominations.
For example Unisuper offers lapsing and non-lapsing options:
What if I have a SMSF?
When it comes to death benefit nominations and self managed funds, things get a whole lot more serious.
The difference between a traditional super fund and a self managed super fund is that all members of a SMSF must also be Trustees of the SMSF.
This poses a problem where the member (and Trustee) of a SMSF dies, because the Trustee decides how the super will be distributed.
The case law is littered with examples where replacement Trustees, or legal personal representatives, take it upon themselves to distribute the superannuation in ways that clearly defied the deceased person’s intentions.
If you do not have a binding death benefit nomination in place for your SMSF, you could be risking significant heartache and cost for your beneficiaries.
In a recent Supreme Court of Victoria decision of Wooster v Morris  VSC594, the court was required to determine the validity of a binding death benefit nomination in respect of a Self Managed Superannuation Fund (SMSF).
The court action was commenced by the deceased’s daughters of an earlier marriage. The deceased and his second wife were members and trustees of a SMSF. Upon the death of the deceased husband in February 2010, his wife (acting in her capacity as the surviving trustee of the SMSF) appointed her son of her first marriage as a joint trustee of the SMSF.
The deceased’s second wife and her son (acting as the joint trustees of the SMSF) preceded to decide that the binding death benefit nomination that the deceased had prepared was not valid. The trustees then resolved to pay the whole of the deceased’s superannuation death benefits to the deceased’s second wife.
The deceased’s binding death benefit nomination in effect gave the whole of his interest in the SMSF (approximately $924,000.00) to his daughters of his earlier marriage.
After the trustees made their decision to pay the whole of the benefit to the deceased’s second wife, the deceased’s daughters challenged the validity of the trustees’ decision and sought orders about whether the death benefit nomination was binding upon the trustees of the SMSF.
The daughters were ultimately successful with their claim against the trustees of the SMSF and also against the deceased’s second wife. The daughters obtained an order from the court for the payment of the superannuation death benefit due to them along with interest and legal costs.
- Superannuation will grow to become one of your largest investment assets
- Super is not directed by your Will, you need to make a specific nomination for how you want it to be distributed on your death
- Regardless of the size of your super fund you should make a binding death benefit nomination
- If you have a SMSF it is even more important to have a valid binding death benefit nomination in place
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.