Superannuation Death Benefit Nominations - Don't be Caught Out (Part 2)

In Part 1, we briefly outlined the manner in which superannuation ought to be factored into estate planning - if you haven't seen it, click here to view Part 1.

In this Part 2, we look at some of the practical consequences of getting superannuation death benefit nominations right, and what can happen when it goes wrong.

So you've read and gotten a brief understanding of superannuation and estate planning, and the different types of superannuation death benefit nominations that you can make in Part 1 of this series of articles. Now to show how those nominations work in practice - the good, the bad, and the ugly.

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Example #1 - Michelle

For this example, we are dealing with our late friend, Michelle. Whilst Michelle is middle-aged and still working, her superannuation death benefits are substantial in value as it includes both her superannuation savings and investments, plus a significant payout from a life insurance policy held by her superannuation fund. Michelle is survived by her 2 infant children from a previous relationship, and her long-term de facto partner, Bill, who has a child of his own. Whilst Michelle is concerned about Bill, her primary concern is for her infant children and their livelihood.

Scenario 1A - Binding Superannuation Death Benefit Nomination

So lets assume that Michelle was prepared, and had implemented a valid binding superannuation death benefit nomination - that is, a direction telling her superannuation fund how they must distribute her superannuation death benefits. By doing so, she can guarantee that her superannuation will be split in the manner that she has chosen, which was:

• 20% to her long-term de facto partner, Bill; and

• 80% to her 2 infant children.

Prior to passing away, Michelle was comfortable in the knowledge that even if she died poor (and didn't have any assets to gift under her will), then she would leave a small portion of her superannuation to her partner, but would be leaving the lion's share for her infant children. She was also happy in knowing that even if her estate was beset by complications (such as Bill's child trying to contest the terms of her will via a family provision claim), that her superannuation was 'quarantined' from her will and estate, and would pass directly to her chosen beneficiaries in the proportions she had selected herself. Even better yet, Michelle was further comforted in knowing that her superannuation death benefits would pass to her de facto partner and children, tax-free.

Scenario 1B - Non-Binding Superannuation Death Benefit Nomination

For this alternative scenario, lets assume that Michelle had only made a non-binding superannuation death benefit nomination, but that nomination is made 100% in favour of her children, as it was made many years ago before she and Bill had started their relationship. So what might happen here?

Michelle's nomination is non-binding, meaning that the trustee of her superannuation fund can override her nomination. After her death, the superannuation fund gathers information about Michelle's family and life at the time of her passing, and they believe that Bill ought to receive a portion of her superannuation death benefits, and so they make a decision to award him 40% of her superannuation death benefits, with the remaining 60% going to her infant children.

Whilst this might seem reasonable, what the superannuation fund isn't aware of is that Michelle and Bill had informally agreed that they would keep their finances and assets separate, and each intended to leave their estate and superannuation to their own children (and deliberately were not leaving any to the surviving spouse, who would be able to support themselves moving forward). Unless Bill notifies those matters to the superannuation fund, they wouldn't be aware of Michelle's ongoing intentions for her superannuation to go to her children; whilst we might hope Bill is honest and trustworthy, experience has shown that is not always the case. A binding superannuation death benefit nomination would have been ideal, to ensure Michelle's intentions are fulfilled.

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Before we go to our next scenario, it's important to note that whilst a binding superannuation death benefit nomination often forms an important tool in estate planning matters, it is not necessarily superior, nor desirable, for every scenario. As with most things in life, there is nuance and no 'one-size-fits-all' approach. The following example demonstrates a potential pitfall of a binding superannuation death benefit nomination.

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Example #2 - John

In this scenario, we are dealing with the affairs of our late friend, "John". John recently died, and is survived by his married spouse and 3 children. To further complicate matters, John separated from his spouse 2 years ago (in a particularly nasty relationship breakdown), but neither of them has yet taken any steps to be officially divorced. John sadly died at 60, a few years short of retirement, and has a large balance left in his superannuation.

Scenario 2A - Binding Superannuation Death Benefit Nomination

For this scenario, John has unfortunately not been well organised. He separated from his spouse 2 years ago, and just never got around to updating his estate planning, and importantly, his superannuation death benefit nomination. Whilst John had forgotten about it, he'd made a binding superannuation death benefit nomination only 2.5 years before he died, back when he was happily married; he forgot to update it after he separated, and it remained valid at the time he died.

Even more unfortunate for John - or perhaps for his children - his valid superannuation death benefit nomination was 100% in favour of his spouse. The consequence of this is that, because it is a valid binding superannuation death benefit nomination (a direction telling his superannuation fund how they must distribute his superannuation death benefits), and he remains married, then the superannuation fund must distribute the full 100% to John's married spouse - even though they were separated and potentially intending to be divorced. This means that John's married spouse (whom he remains technically married to, but separated for all intents and purposes) will receive those superannuation death benefits, and his children cannot even dispute the outcome or make a claim upon John's superannuation death benefits.

Scenario 2B - Non-Binding Superannuation Death Benefit Nomination

For this alternative scenario, the same facts apply, except that John had only made a non-binding superannuation death benefit nomination, which was still 100% in favour of his married spouse. What might occur here?

In this situation, the non-binding nomination is likely to benefit John's children (and likely John's intentions). After John's death, his superannuation fund gets information from his family, and becomes aware that John was separated from his spouse, and had been intention to get a divorce. Because John has made a non-binding superannuation death benefit nomination, his superannuation fund can deviate from the directions given in that nomination. It's uncommon for a superannuation trustee to do so, but extenuating circumstances such as a nasty separation and impending divorce are good grounds to deviate from a nomination in favour of the separated spouse, and instead making a decision to distribute 100% of John's superannuation death benefits to his children.

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Superannuation death benefits are an important element of estate planning, yet care must be taken to ensure they are properly considered and implemented in an appropriate and effective manner. As demonstrated above, technicalities in their operation can have unintended consequences, and so it is important to get professional advice about their implementation and whether it is appropriate for your circumstances. Ashton Estate Lawyers regularly assists clients with advice and preparation of superannuation death benefit nominations as part of their estate planning, often in conjunction with preparation of wills and enduring powers of attorney. Please contact us today for a free 15-minute telephone conversation and see how we can assist you with your estate planning and superannuation matters.