What happens when an eligible beneficiary of a death benefit dies before the benefit is paid?

This question formed the background to a recently issued Private Binding Ruling – the 2024 PBR (reference details below).

The rules of most superannuation funds specify that on the death of a member, the interest or interests of the member will, subject to any binding death benefit nomination, be allocated by the trustee to or amongst a class of eligible beneficiaries of the deceased member.

The class of eligible beneficiaries is restricted to:

(a) the spouse of the deceased member;
(b) a child of the deceased member;
(c) an individual who was a financial dependant of the deceased member at the time of death;
(d) an individual with whom the deceased member was, at the time of death, in an interdependency relationship; and
(e) the estate of the deceased member.

The rules of the superannuation fund may be more restrictive (eg by excluding, say, individuals with whom the deceased member had an interdependency relationship or by specifying children of a particular relationship) but they cannot be more expansive (by including say, siblings or parents (assuming the sibling or parent does not otherwise fall within paragraphs (c) or (d). The restriction on the class of eligible beneficiaries is imposed by the Superannuation Industry (Supervision) Act 1993.

If the rules of the superannuation fund allow members to make binding death benefit nominations, then the member may only nominate individuals within the paragraphs (a) to (e).

It is possible (though rare) that the rules of the superannuation fund could provide that on the death of the member that the death benefit is automatically paid to the spouse or, if there is no spouse, then to the estate of the of the member.

If the member makes a binding death benefit nomination specifying that the death benefit is to be paid entirely to the spouse (or if the rules simply provide that the death benefit is automatically paid to the spouse) then on the member’s death and assuming the spouse survives the member, the entitlement of the spouse will automatically arise.

If the spouse dies after the entitlement has arisen and before the entitlement has been paid what happens? In this case the payment must be paid to the Estate of the deceased spouse and the payment will be taxed as a superannuation death benefit payment and will be tax free as the payment was made to a death benefits dependant of the deceased member. Once received by the estate of the Spouse, the payment will cease to be superannuation death benefit payment.

However, what would the situation be if the spouse died after the member but before any entitlement to the death benefit arose? This situation was the subject matter of a recently released Public Binding Ruling.

The Ruling related to the situation where the deceased member had two discrete superannuation interests in the fund – one interest was subject to a non-binding death benefit nomination and there was no death benefit nomination in relation to the other interest.

The deceased’s Will had a 30-day survivorship provision – the Spouse was only entitled to the estate if the Spouse survived the deceased by 30 days or more. The Will provided that in the event of the Spouse not surviving 30 days, the estate was allocated to the children of the deceased member and the Spouse in equal shares.

As there was no binding nomination, the rules of the superannuation fund conferred a discretion on the trustee to allocate the death benefit (in such proportions as the trustee determined) to or amongst the eligible beneficiaries of the deceased member. In this case the eligible beneficiaries were the spouse of the deceased member, the two adult children of the deceased member and the Estate of the deceased member.

After the member died but before the trustee exercised its discretion, the Spouse died. As the discretion had not been exercised by the time of the death of the Spouse, no entitlement to the death benefit was in existence. Consequently, the trustee could not allocate the death benefit to the deceased Spouse. Further, the trustee could not allocate the death benefit to the estate of the deceased Spouse (as this estate is not an eligible beneficiary - only the estate of the deceased member is an eligible beneficiary).

The trustee then exercised their discretion to allocate the death benefit to the Estate of the deceased member.

Consequently, the death benefit was paid to the Estate. At the time the benefit was paid, no taxation deductions had been made by the trustee.

The question considered by the Ruling was whether the benefit should be treated by the Executor of the Estate of the Deceased Member as a superannuation death benefit - and subject to 15% on the taxable component of the payment or whether the taxable component was not subject to tax.

If it could be argued that the Spouse had an entitlement under the Will to the benefit then there would be no tax. Unfortunately, as the Will had a 30-day survivorship clause, and as the Spouse died within the 30 day period, the Spouse or the Estate of the Spouse had no entitlement. As the Spouse had no entitlement, the Estate was payable to the adult children in equal shares and the taxable portion of the death benefit was liable to 15% tax.

What would have happened if the Will did not have a 30-day survivorship period?

In this situation, the Spouse is entitled to the whole of the Estate of the Deceased Member. This entitlement arises at and by reason of the death of the Deceased Member.

Assuming the death benefit is paid to the Executor of the Estate of the Deceased Member before the death of the Spouse, the Executor would be in a position to determine that the Spouse will be expected to benefit from the death benefit and that the death benefit is treated for taxation purposes as if the Executor of the Estate was a death benefits dependant. Consequently, the death benefit is treated as not being taxable in the hands of the Executor.

If the death benefit is paid to the Executor of the Estate of the Deceased Member after the death of the Spouse will the same result apply? Based upon the reasoning of a 2021 Private Binding Ruling (reference details below) – the answer is yes.

In this case the death benefit will be paid from the Executor of the Member’s Estate to the Executor of the Spouse’s Estate. The death benefit is still to be treated, in the hands of the Executor of the Members’ Estate as if the benefit had been paid to the Spouse. Consequently, the death benefit in the hands of Executor of the Member’s Estate would be tax free. The Executor of the Member’s Estate will be required to pay the death benefit to the Executor of the Spouse’s Estate.

What would have happened there had been a binding nominations in favour of the Spouse?

Assuming the binding death benefit nomination is valid, then on the death of the member, the nomination takes effect and the Spouse (by reason of the binding nomination) has an accrued entitlement to the death benefit.

In this situation so long as the Spouse has survived the deceased member, the accrued entitlement is a presently existing liability of the fund in favour of the Spouse, which liability will be discharged by the payment of the death benefit to the Spouse.

If the Spouse dies before payment is effected, then the payment will be paid to the Executor of the Spouse’s Estate and for taxation purposes, the payment will be treated as if the payment had been paid to the Spouse. As the Spouse was a death benefit dependant of the Member, the payment in the hands of the Executor for the Spouse will be tax free

Conclusion – it is generally better to have death benefits paid directly to the intended beneficiary (rather than indirectly via the estate of the deceased member) via a binding death benefit nomination (best) or by a very timely exercise of the trustee’s allocation power (less satisfactory).

If the death benefit is allocated by a BDBN – the intended beneficiary (in this situation the Spouse) must survive the deceased member.

If the death benefit is allocated by the exercise of the trustee’s discretion, the intended beneficiary must survive until the discretion is exercised.

For more information or assistance with a Death Benefit nomination please call our Help Desk on 02 8296 6266.