The Importance of Superannuation in Estate Planning

Relevant For:

Business owners, retirees and beneficiaries involved in estate planning.

Key Points:

  • Estate plans must consider the complexities of superannuation death benefits and taxation.
  • Superannuation entitlements can’t be included in a Will, but can be directed to an LPR.
  • Trustees of Superannuation Funds decide death benefit distributions.
  • Regular reviews of estate planning arrangements are essential.
  • Dependants include spouses, children under 18, interdependent individuals, and financially dependent parties.
  • Non-tax dependants face substantial tax on superannuation death benefits.
  • Comprehensive estate plans must integrate all assets for effective wealth transition.

Full Article:

Superannuation is becoming increasingly crucial in the lives of Australians, especially as the Federal Government promotes policies encouraging self-funded retirement. Tax-deductible spouse contributions, Transition to Retirement, superannuation splitting, and tax-free income access have been designed to encourage greater superannuation contributions. Consequently, more funds are entering this “tax haven” where they benefit from concessional tax rates.

In the coming decades, Australia will witness an unprecedented wealth transfer as Baby Boomers pass on their assets, including superannuation, to the next generation. The complexities surrounding the payment and taxation of superannuation death benefits make it imperative to consider these factors in estate planning.

An effective estate plan should guide the orderly, tax-effective, and asset-protective transfer of wealth. A Will, while essential, is only a part of this process. Superannuation entitlements cannot be included in a Will, but individuals can direct their Legal Personal Representative (LPR) on the division of these benefits once they enter the estate.

Ultimately, the Trustee of the Superannuation Fund decides the distribution of death benefits, not the family or the executor. Regular reviews of estate planning arrangements are necessary, especially when there are changes in financial or family circumstances. The taxation and payment of superannuation death benefits are governed by superannuation and tax legislation, which defines a “dependant” and determines tax consequences.

Dependants include the deceased’s spouse or de facto partner, children under 18, anyone with an interdependent relationship, or a party financially dependent on the deceased. Payments to non-tax dependents attract significant tax, emphasising the need for careful planning by qualified advisors to minimise this “cost.”

A superannuation fund member cannot direct the Trustee on who will receive their death benefits, but once the LPR takes possession, the Will’s provisions prevail. This allows the deceased to specify the payment of their benefits.

Comprehensive estate planning must integrate both superannuation and non-superannuation assets to ensure an orderly, tax-effective, and asset-protective wealth transition. For instance, a deceased person may have controlled a trust, left personal assets, or had a surviving spouse from a second marriage with children from a first marriage, including dependants with special needs or addiction issues. These complexities highlight the necessity for a tailored estate plan to maintain harmony among beneficiaries.