Australian Superannuation Death Benefits: Who Gets Your Super and How to Plan

Super is one of the most misunderstood assets in Australian estate planning. It does not automatically form part of your estate - which means your will does not control it unless you specifically direct the trustee to pay it to your estate.

• Superannuation is held in trust by your fund trustee - on your death, the trustee decides who receives your super benefit according to the fund's trust deed and the relevant SIS Act provisions, not your will
• The trustee has discretion to pay your super to any eligible beneficiary (dependants or legal personal representative) unless you have a binding death benefit nomination (BDBN) - without a BDBN, the trustee may override your wishes even if you have a will
• Eligible dependants who can receive super death benefits directly (outside the estate): your spouse or de facto partner, your children (including stepchildren and adopted children of any age), any other person in an interdependency relationship with you, and any person financially dependent on you at the date of death
• If there are no eligible dependants, the trustee must pay the super to your legal personal representative (your estate) - where it is then distributed according to your will
• Directing super through your estate (via your will) is sometimes advantageous for asset protection and family provision claim management - but it means the benefit enters the estate and may be subject to estate creditors
• Non-dependant adult children (e.g. financially independent adult children of the member) cannot receive super directly from the fund in many circumstances - they must receive it via the estate, and the taxable component is subject to the 17% death benefits tax
• A carefully coordinated super death benefit strategy - matching nominations to your overall estate plan - is one of the most valuable outcomes of working with a financial adviser and estate planning solicitor together

---

A Binding Death Benefit Nomination (BDBN) instructs your fund trustee exactly who receives your super and in what proportions. It removes trustee discretion - but must be correctly executed to be valid.

• A BDBN must: (1) be in writing, (2) signed and dated by the member, (3) witnessed by two adults who are not nominated beneficiaries, (4) nominate only eligible beneficiaries (dependants or legal personal representative), and (5) be submitted to the fund within the timeframe specified by the trust deed
• BDBN lapse risk: most BDBNs lapse after 3 years under standard SIS regulations - if you do not renew, the trustee reverts to discretion and your nomination is invalid; check your fund's rules as some (particularly SMSFs) allow non-lapsing BDBNs
• Non-lapsing BDBNs: many retail super funds and all SMSFs that amend their trust deed appropriately can issue a non-lapsing BDBN - this does not expire but can be revoked or amended at any time by the member; strongly preferred over 3-year lapsing nominations for peace of mind
• Nomination review triggers: review and renew your BDBN after any major life event - marriage, separation, divorce, birth of a child, death of a nominated beneficiary, or significant change in financial dependency relationships
• Directing to legal personal representative: nominating your 'estate' via the LPR allows your will to control the distribution - useful when you want testamentary trust benefits for beneficiaries, but the super benefit then enters the estate and may face estate creditors and family provision claims
• Non-binding (preferred) nominations: these are a guide to the trustee rather than a binding instruction - the trustee must consider them but is not bound; appropriate only where the member trusts the trustee's discretion completely (e.g. a closely held SMSF where all trustees are close family members)
• Invalid BDBN consequences: if your BDBN lapses or is found invalid (wrong witnesses, expired, incorrect beneficiary category), the trustee exercises discretion - often paying to the spouse, which may not align with your blended family or estate planning intentions

---

Super paid as a lump sum to a non-dependant beneficiary triggers a 17% tax on the taxable component - one of the least well-known tax costs in Australia. Strategic planning can significantly reduce or eliminate this tax.

• Super balances consist of two components: (1) tax-free component (after-tax contributions - non-concessional contributions, personal injury payments) and (2) taxable component (concessional contributions and earnings inside the fund, which have been taxed at 15% inside the fund)
• When a lump sum death benefit is paid to a non-dependant (e.g. an adult financially independent child), the taxable component is subject to 15% tax plus 2% Medicare Levy = 17% effective rate - in addition to the 15% already paid inside the fund, this can represent significant double taxation
• Example: a super balance of $800,000 with 80% taxable component ($640,000) paid to an adult non-dependant child attracts 17% tax on $640,000 = $108,800 in death benefits tax
• Re-contribution strategy: members approaching retirement who anticipate their super will pass to non-dependants can withdraw the taxable component (tax-free after age 60 from a taxed fund) and re-contribute it as a non-concessional contribution - converting taxable component to tax-free component, eliminating the death benefits tax
• Re-contribution rules: the non-concessional cap is $120,000/yr ($360,000 bring-forward for those under the bring-forward age threshold) - for large balances, this strategy takes several years; start early before preservation age is an issue; the member must be eligible to contribute (age and work test requirements)
• Reversionary pension: instead of a lump sum, the pension can continue automatically to a nominated reversionary beneficiary (spouse) - the reversionary beneficiary receives the ongoing pension at 0% tax (if over 60), bypassing the lump sum death benefits tax entirely; the reversionary pension counts against the beneficiary's Transfer Balance Cap
• Superannuation life insurance (death cover inside super): the insured amount paid as a death benefit follows the same taxable/tax-free rules as regular super; directing the insurance payout via a BDBN to dependants avoids the 17% tax

---

For members in pension phase with significant super balances, the structuring of death benefit payments can have multi-generational financial consequences.

• Reversionary pension: a pension that automatically continues to a nominated reversionary beneficiary (typically a spouse) on the member's death - no trustee decision required, no lapse risk, no 17% death tax (for dependants); the pension value at the date of death counts toward the reversionary beneficiary's Transfer Balance Cap with a 12-month grace period to adjust
• Testamentary trust: where super is directed to the estate via the LPR and then distributed via a testamentary trust in the will - the trust receives the super proceeds and can distribute to multiple beneficiaries (including minor children) at adult tax rates under the Division 6AA rules introduced from July 2019 for death benefit income
• Division 6AA and testamentary trusts: from 1 July 2019, ordinary income (not capital gains) distributed to minor beneficiaries from testamentary trusts is taxed at adult rates - removing a significant prior advantage; capital gains still benefit from the adult rate treatment; seek advice on whether testamentary trust advantages remain after these changes
• SMSF-specific: SMSF trustees (who are also members) have greater control over death benefit nominations - non-lapsing BDBNs are achievable by amending the trust deed; the pension reversionary arrangements must be documented in the SMSF's governing rules
• Enduring Power of Attorney: if a member loses capacity, an attorney with enduring power can manage the super account, roll it, change investment options and update nominations - without an EPA the fund is locked until a guardian or administrator is appointed by VCAT/NCAT or equivalent
• Super and family provision claims: directing super outside the estate (via BDBN to dependants) places it beyond the reach of family provision claimants under state succession laws - a significant asset protection benefit for members with complex family situations (blended families, estranged relatives)

---

Super death benefit planning requires action - not just awareness. These steps ensure your intentions are executed and your beneficiaries are protected.

• Step 1 - Check your current nomination: log into your super fund portal and confirm whether you have a BDBN, when it expires, and who is nominated; if it expired or you have no nomination, the trustee has full discretion
• Step 2 - Review every 3 years (or after any life event): diarise your BDBN renewal date and set a reminder 2 months before expiry; include a BDBN review in your annual financial review meeting
• Step 3 - Check your fund allows non-lapsing BDBNs: if your fund allows them, upgrade from a lapsing to a non-lapsing nomination - this eliminates the 3-year renewal risk; SMSF trustees may need to amend the deed
• Step 4 - Calculate the taxable vs tax-free component of your super: log into ATO Online Services or ask your fund; if the taxable component is large and your intended beneficiaries are non-dependants, model a re-contribution strategy with your adviser
• Step 5 - Coordinate with your will: ensure your BDBN and will are complementary - if you direct super to your estate, your will must handle it appropriately; if you direct super to dependants directly, your will must account for the rest of the estate accordingly
• Step 6 - Consider a reversionary pension if already in pension phase: if you have a spouse and are drawing a pension, a reversionary nomination ensures the pension continues seamlessly and avoids trustee discretion, lump sum processing delays and death tax
• Step 7 - Review life insurance inside super: ensure the death benefit nomination for any insurance held inside super is consistent with your BDBN; in some funds these are separate nominations that can diverge

---

Smart financial planning is about protecting what you've built - and enjoying life while you build it. Roopon members access exclusive partner discounts across Australian dining, retail, health and lifestyle, plus FREE included prize-draw entries per their plan and published campaign terms.

Join at roopon.com.au from $19.99/month.

---

Join Roopon today and get access to FREE included prize-draw entries plus exclusive member discounts.

Join ROOPON Now