Need to know
- You can currently nominate where any leftover super goes, but nominating that it goes to your estate to be dealt with under your will is complicated
- Experts say making super automatically part of your will may simplify things, but would introduce new risks
- Super Consumers Australia is calling for an independent review of death benefit nominations
Many people assume that any super left over when they die automatically becomes part of their will, but this isn't the case.
As we explored in our previous article on death benefit nominations, if you die with super remaining, your super fund will distribute this money. You can nominate where you want your money to go, but the process is complex.
You can also tell your fund to make any remaining super part of your estate, dealt with under your will.
In theory, a change to the law could scrap the death benefits nomination system and make all leftover super part of your will, making the process more straightforward.
In this article, we look at the pros and cons of this proposal.
Death benefit nominations vs wills
The table below compares how your leftover superannuation might be managed under the two different systems.
| Death benefit nominations | Wills |
|---|---|
| You can only distribute the money to a spouse, dependent or person in an interdependent relationship. | You can distribute the money to a greater range of people, including parents, friends, siblings, charitable organisations etc. |
| Super fund may have ultimate discretion over where the money goes. | Super fund has no discretion over where to pay the money. |
| Super fund may be able to process payment more quickly. | Process may be slower as the person distributing the money applies to a court for probate or letters of administration. |
| More protection against creditors claiming the money. | Less protection against creditors claiming the money. |
| 'Tax beneficiaries' (including spouses, children or a person in an interdependent relationship with the deceased) pay no tax on a lump sum. | Some recipients may pay more in tax. |
Upsides to making super part of your will
One positive outcome from making super part of your will is that you could give any remaining super to a broader range of people than you can with a death benefit nomination.
Other potential advantages of wills over death benefit nominations include removing your fund's ability to decide where your money goes and avoiding the possibility of your wishes lapsing.
You could give any remaining super to a broader range of people
Given the complications around death benefit nominations and the fact that you can elect to treat your remaining super this way, scrapping the nominations system would seem a constructive way to streamline the process.
Writing a will may also be an easier process.
Peter Christensen, an honorary lecturer at the Australian National University, notes the formal requirements for making a death benefit nomination "are tougher than making a will".
Downsides of making super part of your will
Risk of challenges to a will
Estate law in Australia varies from state to state, but generally speaking, a person who doesn't get anything in a will, or doesn't get as much as they believe they're entitled to, can legally challenge the will if the person who made the will had a responsibility to provide for them.
Mark Tanner, an associate lecturer at the University of Queensland, says if more people could challenge where a person's money goes when they die, this would move the system away from its current intent, which he says is "to enable the wishes of the person who's passed to be fulfilled".
"If you change super so that everything goes into the estate, you'd lose the benefit of being able to directly nominate people."
Risks of claims from creditors
Josh Mennen, a spokesperson for the Australian Lawyers Alliance, believes making death benefits automatically part of the estate isn't necessarily better as beneficiaries may face claims to the money from anyone who was owed by the deceased.
Prue Vines, a professor at the University of New South Wales, says the current system has advantages in protecting beneficiaries from claims.
"At the moment, with superannuation in a separate basket, it actually can protect the estate from … having to pay certain debts," she says.
Tax considerations
Mennen also noted that making super part of the estate could see the recipients of the money pay more tax.
A side issue here is that people may need guidance to get the most out of the current set-up.
"The complexity of [death benefit nominations and estate planning] makes it a really hard system to navigate for individuals," says Tanner.
Wills may be slower to distribute the money
Some lawyers and advisers have noted that money distributed by a binding death benefit nomination can be paid more quickly to the beneficiaries than money dealt with through a will.
When money is distributed through the estate rather than as a death benefit, the beneficiaries may have to wait until the person distributing the funds gets letters of administration (where there is no will) or probate (in the case of a valid will).
These orders are essentially a court giving the person the go-ahead to distribute the money.
A super fund doesn't have to go through this process, meaning the beneficiary could have their money sooner.
Superannuation not designed for estate planning
Vines raises another issue with super becoming part of the estate.
"You lose that whole (requirement) that it should only go to dependents," she says. "The basic legislative aim of Australia's superannuation system was to protect people in their old age, and then, if necessary, to protect their vulnerable dependents."
The Retirement Income Review has confirmed that super's purpose is to provide retirement income rather than pass on significant bequests that attract tax concessions.
Need for a review of the process
As we've outlined here, wills have benefits over death benefit nominations for some members as you have greater scope where to direct any leftover super you have when you die.
However, wills (or estate laws) have a number of drawbacks. It isn't necessarily a simple way to resolve the problems and complexities around distributing leftover super.
And as we saw in part one of our article of what happens to your leftover super when you die, many people raise complaints about the death benefit nomination process, the process can be confusing, and that experts think the system should be reviewed.
An independent review could bring some clarity to the process and give people peace of mind around
Franco Morelli, Super Consumers Australia
Super Consumers Australia policy manager Franco Morelli says an independent review could point the way to a system that works better for super members.
"We know there's a lot of complexity around both death benefit nominations and using the will to pass on any remaining super a person may have," he says.
"An independent review could bring some clarity to the process and give people peace of mind around what happens to their remaining super."
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