Introduction
Estate planning is the process of arranging for the management and disposal of a person's estate during their life and at and after death, while seeking to minimise tax, other costs, and legal complications.
Superannuation, as a large asset class, must be integrated into estate planning to ensure that upon death, benefits are distributed in the most tax-effective manner and according to the member's wishes.
As solicitors specialising in estate law, we often encounter clients who are surprised to learn that their superannuation—the cornerstone of their retirement savings—is not automatically part of their estate. While superannuation is a financial resource designed to provide for your needs in retirement, it is equally crucial in estate planning.
Superannuation and Estate Planning: An Unmissable Pair
When preparing an estate plan, it's vital to understand that your superannuation is not automatically governed by your will. Rather, your superannuation fund's trustee often has discretion on how to distribute your super upon your death, unless directed otherwise. As a result, superannuation becomes a unique, significant asset class requiring specific consideration in your estate planning process. By effectively integrating your superannuation into your estate planning, you can ensure that your benefits are distributed according to your wishes and in the most tax-efficient manner.
Navigating Beneficiary Nominations
Superannuation funds allow members to make a 'beneficiary nomination'. This process involves instructing the super fund's trustee how to distribute your superannuation benefits in the event of your death.
Beneficiary nominations come in two forms: binding and non-binding.
1. Binding Nominations: A binding nomination offers certainty on who will receive your superannuation benefits. It requires the trustee to distribute the death benefit as per your valid nomination. Keep in mind, though, that these nominations often come with an expiry date (typically every three years but sometimes sooner), and there are strict legal requirements to keep them valid.
2. Non-binding Nominations: A non-binding nomination provides guidance to the trustee without legally binding them. While this option gives the trustee discretion, it could also lead to disputes between beneficiaries.
In light of these considerations, it's crucial to understand your options and make informed decisions about beneficiary nominations within your superannuation fund.
Tax-Efficient Superannuation Strategies
The tax implications of superannuation death benefits can be complex, and the strategy you choose can significantly affect your beneficiaries' financial outcome.
1. Dependents: Superannuation death benefits paid to dependents (under tax law, including spouses, children under 18, financial dependents, and inter-dependents) are generally tax-free.
2. Non-dependents: For non-dependents, death benefits can attract tax. The taxed element is taxed at 15% plus the Medicare levy, and the untaxed element is taxed at 30% plus the Medicare levy.
3. Reversionary Pension: A reversionary pension could be a tax-efficient strategy. If you were receiving a pension at the time of your death, your beneficiary may choose to continue receiving this as a reversionary pension. This approach can provide significant tax advantages, particularly for beneficiaries who are tax dependents.
Self-Managed Super Fund vs Traditional Superannuation
A Self-Managed Super Fund (SMSF) is a private superannuation fund that you manage yourself, providing an alternative to retail and industry super funds.
Both Self-Managed Super Funds (SMSFs) and traditional Superannuation funds are designed to help individuals save for retirement, but they offer different levels of control, investment options, costs, and responsibilities. Here's a comparison:
A. Control and Flexibility
SMSF: With an SMSF, you are the trustee and have the flexibility to choose and manage your investments. This level of control allows for a tailored investment strategy based on personal preferences and risk tolerance.
Traditional Superannuation: These funds are managed by a fund manager. You can choose the type of fund (e.g., growth, balanced, conservative) based on your risk tolerance, but you do not have direct control over the specific investments.
B. Investment Options
SMSF: SMSFs offer a broader range of investment options. You can invest in direct property, direct shares, managed funds, term deposits, and more.
Traditional Superannuation: Investment options are generally grouped into pre-determined categories. While this offers diversity, it does not offer the same degree of customisation as an SMSF.
C. Cost
SMSF: Costs can be higher due to the need for annual audits, legal tax advice, and the time investment required to manage the fund. However, SMSFs can be cost-effective for larger balances due to the flat nature of some of the fees.
Traditional Superannuation: Fees are usually charged as a percentage of your fund balance. These can be lower for smaller balances compared to an SMSF, but for larger balances, traditional super funds might become more expensive.
D. Responsibilities
SMSF: As an SMSF trustee, you are responsible for all compliance, regulatory requirements, tax reporting, and ensuring the fund is appropriately audited. This responsibility is substantial and requires a commitment of time and expertise.
Traditional Superannuation: Compliance, tax reporting, and auditing are managed by the fund, freeing you from these responsibilities.
E. Regulations and Protections
SMSF: SMSFs are regulated by the Australian Taxation Office (ATO). SMSFs are not eligible for compensation in the event of theft or fraud.
Traditional Superannuation: These funds are regulated by the Australian Prudential Regulation Authority (APRA), and members may be eligible for compensation in the event of theft or fraud.
The decision to choose an SMSF or a traditional super fund should be based on factors such as your financial situation, investment knowledge, time commitment, and retirement goals. It's wise to seek professional financial advice when making this decision.
The Imperative of Regular Reviews
Much like other aspects of your financial planning, your superannuation arrangements should not be set and forgotten. Instead, they need regular reviewing, especially when personal circumstances change. Events like marriage, divorce, the birth of a child, or a significant shift in your financial situation necessitate a review of your superannuation and overall estate plan. This practice ensures alignment with your current wishes and the needs of your beneficiaries.
In Conclusion
The realm of superannuation and estate planning can be complex, but with the right knowledge and guidance, it's possible to maximise your benefits and reduce tax liabilities significantly. Careful planning and regular review of your superannuation arrangements, including beneficiary nominations, can help maximise benefits and reduce tax liabilities, ensuring financial security for your loved ones after you've gone.
If you would like to speak with one of the solicitors in our award-winning estate planning team, please do not hesitate to contact us.
Article by Connie Ung.
E: ConnieUng@robbinswatson.com.au
P: (07) 5576 9999
Connie is a solicitor practising predominantly estate planning and deceased estate administration, at Robbins Watson Solicitors. See her full profile here:
https://robbinswatson.com.au/our-people/connie-ung