As we have previously discussed, estate planning is the process of digging down into your family, your assets, and your liabilities to ensure that there is a smooth transition of your wealth to your beneficiaries in a manner which reflects your wishes.
While most people will focus on a Will, which is probably one of the most important aspects in estate planning, one aspect that often gets overlooked and needs special attention is that of superannuation.
Superannuation in estate planning holds great importance as there needs to be consideration about how to best leverage superannuation effectively so that financial security is maximised and your legacy protected for your loved ones.
For most of us, superannuation sits in the background of our assets however, it forms a substantial part of your wealth and is designed to provide financial support to you during your retirement years. However, it needs to be understood that superannuation and the way it is managed through estate planning means that the impact superannuation has will extend beyond your lifetime.
By working with estate planning lawyers and financial advisers, you can ensure that the wealth you have accumulated over a lifetime is distributed according to your wishes.
Death Benefit Nominations
A crucial element of your superannuation is how and who you nominate as a beneficiary on your superannuation policy.
There are several ways to nominate a beneficiary under your policy including:
Binding death benefit nomination
A binding death benefit nomination (BDBN) is a legally binding nomination which instructs your superannuation trustee to distribute your death benefits to specified nominees you have nominated.
There are certain requirements that make a BDBN valid however, if these are met, you can ensure that your superannuation entitlements are distributed as intended allowing you to retain control and certainty over the funds accumulated.
A BDBN can be either lapsing or, non-lapsing. A lapsing nomination expires after three years and must be updated to remain valid. A non-lapsing nomination will remain valid until it is either changed, revoked or becomes invalid (eg: the death of the nominated beneficiary).
Non-binding death benefit nomination
Unlike a BDBN, a non-binding nomination is more of a recommendation to your superannuation trustee on how your death benefits are to be distributed. The trustee of your fund will take your nomination into consideration however, they have the discretionary power to make the final decision which may not be in line with what you wanted.
Your non-binding nomination will not lapse unless you change or revoke it.
Reversionary beneficiary nomination
A reversionary pension is a way to make things easier for your spouse or partner (your reversionary beneficiary) when you pass away. By nominating a reversionary beneficiary, your pension payments continue under the existing terms and conditions. This provides security to your beneficiary as they will know exactly how and when the payments will be received. By having this in place, you can take away some of the challenges, stress and decisions at this difficult time.
When dealing with superannuation, there are a number of tax considerations that need to be addressed. The way tax is treated on superannuation benefits will depend on various factors including:
- the age of the deceased;
- the beneficiaries;
- are the benefits lump sum or an income stream; and
- how were superannuation contributions made.
By properly structuring superannuation entitlements, you can minimize tax liabilities which in turn will maximise the financial benefit to your beneficiaries.
Estate planning is a complex process and when dealing with superannuation, it could be beneficial to incorporate Testamentary Trusts into the process. We have discussed testamentary trusts before but essentially, these are trusts created in your Will which only become enlivened upon your death.
By working through a detailed estate planning process, you can direct superannuation proceeds into a Testamentary Trust which can provide added protection for beneficiaries and can again minimize tax liabilities.
As we recommend with your Wills, you need to be reviewing your superannuation arrangements:
- whenever a significant life event occurs (eg: marriage, death, divorce, etc);
- when you have new or have altered your financial goals;
- when there are changes to legislation dealing with superannuation; or
- on a regular basis such as when you receive your annual statement.
Superannuation is important for your financial well-being throughout retirement however, its importance carries on after you have passed away. Given the complexities and legal and tax considerations involved, it is essential that you receive professional advice from lawyers, financial planners and accountants.
Our Wills and Estates Team understands the intricacies of superannuation in estate planning and will work with you to leverage tools such as BDBN and Testamentary Trusts while working with your other advisors to provide security for your beneficiaries and future generations. For more information, please contact us at 03 9614 7111 or email at email@example.com.