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Death, Divorce: What Happens To Your Super?

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Superannuation is likely to be one of your most valuable assets, especially later in life as your balance grows and you prepare for or enter retirement.

However, the legal treatment of superannuation in cases of major life changes – like divorce or death – is often different from that of your other assets that may form part of your estate.

Familiarising yourself now with super safeguards will help you and your family deal with such life changes. The below provides some helpful guidance but should not be taken as specific financial or legal advice, writes Pauline Vamos.

DIVORCE

Under Commonwealth legislation, when people who are legally married enter into divorce proceedings, the amounts held by each individual in superannuation are taken into account in family law settlements, family law agreements, and family law court decisions regarding the splitting of assets. There are also provisions for the splitting of accounts and transfer of assets.

The inclusion of superannuation assets in these family law processes is important, as it ensures that you are entitled to know about the assets held in superannuation by your partner (and vice versa), and that these will be taken into account when you reach a settlement and your overall wealth is divided.

In most cases, superannuation balances won’t be literally split following divorce or separation. Instead, your super balances will affect the overall balance of assets and the allocated split of other assets, like the family home, savings and investments.

However, circumstances can be different once you and/or your partner are fully retired, as superannuation may be a substantial asset and could be an income stream or a pension from a defined benefit fund. If one partner has a lar ge proportion of assets that support a defined benefit pension, for example, it may be a more suitable division of assets to split the income stream.

There can also be challenges involved if you hold your accounts in a self-managed superannuation fund as you are both trustees of the fund, but may have different levels of knowledge and involvement. This makes it important that all members of such funds have good documentation and knowledge in place before a major life change happens.

It is also important to keep the above in mind and prepare your documentation in the case of divorce or split (of a de-facto relationship). Knowing where you stand will help you to negotiate with your partner about the division of assets and ensure that you receive a fair proportion of assets inclusive of your superannuation savings.

DEATH

Knowing your options and preparing your superannuation in case of death is important, especially as superannuation assets are often not covered by a general will.

There are, in most cases, three possible processes for payment of a superannuation balance in the case of death of an account holder:

  • A beneficiary or beneficiaries confirmed by the trustees of the fund
  • A beneficiary or beneficiaries chosen by the account holder and recorded in a binding death benefit nomination
  • Payment to the account holder’s estate

When the first process described above applies in your fund, you generally will be invited to complete a nomination of beneficiaries form, which will advise trustees of your preference for the allocation of a death benefit. The trustees, however, will have final discretion on the recipient of the death benefit (as long as the recipient is eligible to be considered a dependant of the deceased).

If there are no eligible nominated beneficiaries, these funds will conduct research to discover potential beneficiaries. Generally, spouses and infant children are given priority in the distribution of a superannuation death benefit.

A binding death benefit nomination, which is also accepted by many funds, mandates that the trustee must pay the death benefit to the nominated beneficiaries, providing the person(s) nominated meet dependent eligibility requirements and the nomination is updated every three years.

For your nominated beneficiary to be considered an eligible dependent to receive superannuation benefits (in all circumstances listed above), they must fall within one of the following categories:

  • Spouse (including legally married couples, same-sex and opposite-sex de factos)
  • Child of any age (including biological, stepchildren, adopted children, biological children of a partner)
  • Financial dependent
  • Interdependent (must have a close personal relationship, live together, one or both provides the other with financial support, one or both provides the other with domestic support and personal care).

If there are no nominated beneficiaries, the trustees of the superannuation fund will identify beneficiaries based on the above criteria. If none can be found, the benefit is paid to the deceased estate.

Spouses, children under the age of 18 (or 25 if still financially dependent on the member), financial dependents and interdependents are able to receive the full death benefit tax free, and if the deceased was in an APRA-regulated fund, these beneficiaries may also be eligible for an anti-detriment payment equivalent to an extra 15 per cent. In most cases, this offsets the tax that has already been paid in regard to the balance of the super fund.

Adult children are not considered to be a tax dependant of their parents, so while they can still be a nominated beneficiary, they will incur a 17 per cent tax on the lump sum death benefit upon receipt. The processes may seem complicated at first, but understanding the treatment of super in the case of death and the ways that you can make your wishes known ahead of time will help you to ensure that your dependants are looked after financially if tragedy strikes. It is never too early to ensure that your fund and its trustees are aware of your chosen beneficiaries, and it is worth revisiting this documentation every few years to ensure that it is current.

Managing your super in the case of divorce

  • Be informed – make sure that you have a general idea of your (and your partner’s) current superannuation account balance(s) and which funds they are in
  • Talk to your accountant as early in the process as possible
  • Keep documentation, including statements and Trustee agreements (in the case of an SMSF)
  • Know what your legal entitlements are

Nominating a beneficiary for your super

  • Super is not covered by your will – set aside time to prepare your wishes with regard to your super balance separately
  • A binding death benefit nomination has to be renewed every three years. Make sure you’ve nominated someone who fits in the classes of beneficiaries or they will not be eligible.
  • If you’re in a self-managed fund, any inheritance decisions in the case of death will be made by the remaining trustees and/or a replacement trustee or by the corporate trustee unless you have a binding death benefit nomination.
  • Remember that a spouse will generally be the default beneficiary. If this is not your preferred beneficiary, make sure you have your wishes known via binding death benefit nomination and notifying your fund trustees.

ABOUT
pauline-vamosMs Pauline Vamos

Chief executive officer of the Association of Superannuation Funds of Australia (ASFA), Pauline Vamos is a qualified lawyer and has over 20 years’ experience in the financial services industry.

Pauline is a member of the Federal Government’s Superannuation Advisory Committee and was on Treasury’s Stronger Super Peak Consultative Group. In May 2012, Pauline was appointed to the Advisory Council for the newly established Centre for International Finance and Regulation. She also sits on the Infrastructure Finance Working Group and the Superannuation Roundtable.

About the author

Alana Lowes

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