Death Benefit Misconceptions

While self managed superannuation funds are not subject to the jurisdiction of the Superannuation Complaints Tribunal, the annual report of the Tribunal makes interesting reading.  In particular, the annual report noted that the superannuation benefits of a deceased member do not automatically form part of the estate of the deceased member.  

The superannuation benefits not automatically forming part of the estate of the deceased member may seem strange.  The reason for the current situation is primarily due to history.  The reason for the current situation not being changed is primarily due to the flexibility that the current situation provides.

Many years ago – before the invention of colour television – tax was levied either on the estate of a deceased individual (death duties) or upon inheritances received from a deceased estate (succession duties).  If the superannuation benefit of a member was automatically paid to the estate then the benefit would have been subject to such duties.  Consequently, a practice developed that superannuation benefits would be allocated at the discretion of the trustees.  This meant that the superannuation benefits was not treated as forming part of the estate of deceased members.  

Given that death and succession duties died long before 3 kg/1G mobile phones were introduced, there is now no tax or legislative reason preventing a superannuation fund from automatically paying death benefits to the estate of the deceased member.  However this is not the current practice and the reason is due to the flexibility of trustee decisions and, to a lesser extent, the ability to pay death benefits directly to the dependants without having to wait for probate.

A super trustee would be poorly advised to pay a death benefit to the estate before the appointment of the legal personal representative (executor or administrator of the estate) had been confirmed by the Court as the trustee could not obtain an effective and valid discharge for the payment.   Obtaining probate of the Will or letters of administration (as the case may be) may take two or three months or considerably longer.   

By comparison the benefit payable from the superannuation fund may be ready for payment within one or two weeks of the death of the member (or longer if there are insurance proceeds to recover).

Most superannuation funds will want to provide (as do the SUPERCentral Governing Rules) members with the greatest possible choice as to the allocation of superannuation benefits.  Consequently, the governing rules of superannuation funds (as does SUPERCentral) provide that the member may make a binding death benefit nomination with the trustee having a discretion as to the payment of the death benefit where either the member does not make a binding death benefit nomination or to the extent the nomination does not completely allocate the death benefit (for example, if the nomination nominated Bill but Bill died before the member died).

And now for the boring legal bit – the super benefit of a member is held on a primary trust for the member during their lifetime and, on their death, the primary trust terminates and the benefit is then held on a secondary trust (which is a different and separate trust from the primary trust) being a distribution trust for the benefit of the dependants of the deceased member which are selected by the trustee.  

If the governing rules permit, the operation of the distribution trust can be overridden by the member making a nomination as to how their death benefits are to be allocated to their dependants.  This nomination is called a binding death benefit nomination.  From a (boring) legal perspective this nomination is really the member exercising a power of appointment which the governing rules has conferred.  This power need not be exercised but must be exercised during the member’s lifetime.  If the power of nomination is exercised by the member then the binding death benefit nomination takes effect and there will be nothing on which the secondary/distribution trust can operate.  If a binding nomination is not made or, the nomination does not completely allocate the benefit, then the secondary/distribution trust applies to the benefit (or the balance of the benefit not allocated by the binding nomination).