Where does your superannuation go when you die?

This week I was involved in an ABC radio program about superannuation and death. It was evident from listeners' calls that many people are confused about this important topic, with many comments being either wrong or just partly true.

The fundamental principle is that superannuation is not bequeathed in terms of your will - it is the trustee of your superannuation fund who gets to say where the money will go. Many listeners thought that was unfair, and were amazed that the trustee could override a nomination that you had made on the form you completed when you joined the fund.

I pointed out that the trustee should take these instructions into account, but other factors could come into play. I gave as an example the fun question that was given to an audience of superannuation professionals at a Christmas lunch a few years ago.

We were told that John was aged 22 when he married Susan. He had nominated Susan to receive the proceeds of his superannuation on his death. Susan and John had one child, but they subsequently divorced. John moved in with Margaret, and they had two children. John subsequently died of a heart attack - in bed with his new lover, who just happened to be pregnant with his child. The question was, "If you were trustee, who would you give the proceeds to?"

The story illustrates the complications that occur when relationships break down. If you absolutely want to spell out who gets what from your super, you'll have to sign a Binding Death Benefit Nomination for the trustee of your super fund, which compels the trustee to act in accordance with your nomination.

The problem is that it's a great tool in the right circumstances, but a dangerous one if used incorrectly. You see, there is a death tax of 17 per cent (15 per cent plus Medicare Levy) which is charged on any taxable component of your superannuation that is left to a non-dependant. In this context, a spouse is regarded as a dependant irrespective of their financial position, so the death tax is more applicable to single people or those who have been widowed.

Think about Robin, who has $1 million in super, and is part of a healthy, functional and supportive family. Without advice, Robin executes a binding nomination that leaves 50 per cent of her superannuation to her spouse, and the remainder to be divided equally between their two children, who are professionals with high incomes. Robin dies suddenly, and because of the binding nomination the trustee distributes $500,000 tax-free to her widower, and $250,000 each to the children. The superannuation was all taxable, so the children faced a total tax bill of $85,000. If there had been no binding nomination, the trustee could have left the entire balance to the widower tax-free. He could then have passed on to the children, as a tax-free gift, such sums as they thought were reasonable.

Contrast this situation with that of John, from our example above. His ex-wife, widow and lover don't get on, and nor do their children. Not all of them get on with John either. If there was no binding nomination form there could be years of legal wrangling as the kids all fought for the money. Binding nomination would prevent that happening.

The lesson here is to take good advice when doing your estate planning.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au

This story So where does your superannuation go when you die? first appeared on The Examiner.