Superannuation death benefits are a minefield and arguably in need of simplification and reform.
You could mount a good argument that the problem begins with how super funds are structured in the first place – they are, of course, trust instruments.
The trust structure has many positive features when running retirement savings schemes. One significant aspect is the flexibility trusts offer compared to other structures. It is possible to design these trusts to suit most requirements someone might need.
But this flexibility creates a great deal of variation in how important issues are dealt with. One of the issues is death benefits – who receives them and why, how they are paid, how much tax is paid and any other limitations.
These variations mean it is very difficult for anyone to talk about death benefits with any certainty without carefully examining all relevant documents for each specific case.
The increasing wealth in superannuation – and SMSFs in particular – means beneficiaries are already taking a closer look at their ability to have some of that money distributed to them.
Over the past five years, we have seen an increasing number of court cases involving super fund death benefits. For example, last year the New South Wales Supreme Court distributed proceeds from at least one SMSF to pay a benefit to a deceased’s estranged son.
In the past three months, the Queensland and West Australian Supreme Courts have handed down decisions involving super fund death benefits.
The Queensland case involved many issues that are routinely talked about as vital parts of many financial planning structures – a reversionary pension worth several million dollars, binding death benefit nominations (BDBN) and enduring attorneys jointly making decisions for a trustee that had lost capacity. Also involved in this case were children from a prior relationship and lost documents.
The WA case involved a death benefit and whether or not it could be paid straight to the deceased’s spouse or had to be paid to his estate.
One attraction of super is it can be dealt with outside the often cut and thrust and seeming uncertainty of wills and estates.
Binding nominations – good or bad?
BDBNs are often seen as solving many problems and creating much-desired certainty. But one problem with these documents is their variety and the lack of knowledge about them. Does the document lapse after a period of time? Was it executed validly? Can an enduring attorney execute it? What happens if none was executed?
Who controls a super fund when a member dies and what are their obligations?
In many cases, these are $64 million questions. Can a belligerent trustee that refuses to act or perform an action be forced to do so without a court making an order demanding action?
Tax brings its own complexities
The contribution rules and taxation of death benefits – including the additional tax on death benefits paid to non-dependants – mean many elderly people in retirement want to plan carefully. And those paying life insurance proceeds to non-dependants need to be especially careful, with such amounts incurring additional taxation.
And the advent of the 2016 Turnbull/Morrison/O’Dwyer changes have made death benefit planning even more complicated. The transfer balance cap and its twin, the total super balance, both create a large number of estate planning problems.
The SIS Act and Regulations also don’t help
The Superannuation Industry (Supervision) (SIS) Act only allows two lump sum death benefits to be paid. I’m sure there is a logical explanation for this limitation, but, on the face of it, it does appear an unnecessary restriction. For example, suppose a spouse dies and the family receives a modest lump sum to pay for the funeral. A short time later the deceased’s surviving family need some money to keep life ticking over before the life insurance company pays the death claim. So another small lump sum is paid. And after the death insurance claim is paid, the family would like a lump sum to pay off the house mortgage and other debts. But we can’t do that because two lump sums have been paid out.
Pay all death benefits to the estate?
Some Australian Prudential Regulation Authority-regulated funds pay all death benefits to the estate to exclude their fund from the time spent dealing with death benefit disputes, especially those referred to the Superannuation Complaints Tribunal – soon to be replaced by the Australian Financial Complaints Authority. I am not sure many practitioners in the SMSF arena would favour this type of limitation.
One attraction of super is it can be dealt with outside the often cut and thrust and seeming uncertainty of wills and estates. Paying to the estate eliminates this flexibility.