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Questions & Answers - Death Benefit Agreement


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+ What happens to my Super after I die in a SMSF?

Under current Superannuation Laws, your Superannuation Benefit does not form part of your Estate on your death. This means that your Super Benefit will not be automatically distributed in accordance with your "Will" on your death. So in the event that you do have a Death Benefit Agreement in place of your death, your Super Benefit will be distributed in accordance with the provisions of your SMSF Trust Deed. The SMSF Deed used by ESUPERFUND currently states that to the extent that no Death Benefit Agreement has been made to your SMSF prior on your death, your Super Benefit may be distributed in accordance with the discretion of the remaining Trustees of the SMSF. This may or may not comply with your intentions and more importantly may result in an unfavourable tax outcome. In addition the remaining Trustees may disagree on how to distribute your Super Benefit on death creating legal issues most of us would prefer to avoid. To avoid these complications it is strongly recommended that all Members of a SMSF execute a Death Benefit Agreement once their SMSF has been established.

+ What is a Death Benefit Agreement?

To ensure that your Super Benefit is distributed in accordance with your wishes on your Death you must make a Death Benefit Agreement. A Death Benefit Agreement "binds" the Trustees of your SMSF to pay your Super Benefit as you intend and not at the discretion of the Trustees. Please note that the Death Benefit Agreement used by ESUPERFUND differs to a Binding Death Nomination because it does not lapse after 3 years as is the case with a Binding Death Nomination. This is because the Death Benefit Agreement actually forms part of the Trust Deed and thereby binds the Trustees of the Fund to pay the benefit to the nominated beneficiaries specified in the Agreement. Features of the Death Benefit Agreement are as follows:

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    The Death Benefit Agreement forms part of the Trust Deed (our Trust Deed is compliant)
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    The Agreement is in writing
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    The persons noted in the Agreement are made to Permitted Beneficiaries (see below)
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    The amount to be paid to each person is clearly specified
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    The Agreement is non-lapsing
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    The Agreement is signed and dated in the presence of two witnesses over 18 neither of whom is nominated to receive a benefit
+ Who can I nominate as a Beneficiary in a Death Benefit Agreement?

Under a Death Benefit Agreement, you can nominate the following beneficiaries to receive your Super Benefit on death. Each beneficiary is further explored here.

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    Spouse (includes former Spouse, De Facto and same sex couples)
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    Child (including an adopted or step child)
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    Any Person who was a Dependent just before death (ie relied on you for financial maintenance)
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    Any Person with whom you had an "Interdependency Relationship" just before death
  •  
     
    Your Estate via your Legal Personal Representative (this is usually the Executor of your "Will")
+ How soon must my Super Benefit be paid after Death?

When you die your Super Benefit must be paid to the nominated beneficiaries (if there is a Death Benefit Agreement in place) or by the remaining Trustees at their discretion (if there is no Death Benefit Agreement in place) as soon as practicable after the Member's death. There are no legislative guidelines on what constitutes as soon as practicable and it is generally assumed to be within 6 to 12 months

+ How often must the Death Benefit Agreement be updated?

A Death Benefit Agreement is Non Lapsing. That is the Death Benefit Agreement used by ESUPERFUND differs to a Binding Death Nomination because it does not lapse after 3 years as is the case with a Binding Death Nomination. This is because the Death Benefit Agreement actually forms part of the Trust Deed and thereby binds the Trustees of the Fund to pay the benefit to the nominated beneficiaries specified in the Agreement.

+ Who keeps the Death Benefit Agreement?

A Death Benefit Agreement should be maintained by three parties to ensure your intentions are followed. A copy should be kept by you, a copy should be kept by the SMSF Administrator (ie ESUPERFUND) and a copy should be kept by your legal representative who prepared your "Will" for you.

+ How much does ESUPERFUND charge for a Death Benefit Agreement?

It is FREE to implement a Death Benefit Agreement with ESUPERFUND.

+ How do I apply for a Death Benefit Agreement?

To implement a Death Benefit Agreement for each Member of your SMSF simply visit and submit an online application here.

+ What are the implications of leaving my Super Benefit to my Spouse?

You can nominate your Spouse (includes former Spouse, De Facto and same sex couples) to receive your Super Benefit on death as either a Pension or Lump Sum payment. Where your Super Benefit is paid to your Spouse as a lump sum it is tax free to them. Where your Super Benefit is paid to your Spouse as a Pension it is taxed as follows:

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    If either the spouse or the deceased is over 60 at the date of death, the pension is paid tax free.
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    If both the spouse and the deceased are under 60 at the date of death, the pension is taxed at the spouses' tax rate less any Tax Free amount. A Pension Rebate of 15% also applied on the Taxable Amount. Once the spouse turns 60, the pension is paid tax free.
+ What are the implications of leaving my Super Benefit to my Child who is under 18?

You can nominate any Child (including an adopted or step child) under the age of 18 to receive your Super Benefit on death as either a Pension or Lump Sum payment. Where your Super Benefit is paid to your Child who is under 18 as a lump sum, it is tax free to them. Where your Super Benefit is paid to any child under 18 as a Pension it is taxed as follows:

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    If the deceased was over 60 at the date of death, the pension is paid tax free.
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    If the deceased was under 60 at the date of death, the pension is taxed at the child's tax rate less any Tax Free amount. A 15% Pension Rebate also applies to the Taxable Amount.

It is noted that a Pension can only be paid to a Child up to the age of 25. After that time they must take the remaining super benefit as a lump sum.

+ What are the implications of leaving my Super Benefit to any Child aged between 18 and 25 that is Financially Dependent on you?

You can nominate any Child (including an adopted or step child) aged between 18 and 25 that is Financially Dependent on you, to receive your Super Benefit on death as either a Pension or Lump Sum payment. Where your Super Benefit is paid to any Child aged between 18 and 25 that is Financially Dependent on you as a lump sum it is tax free to them. Where your Super Benefit is paid to any child aged between 18 and 25 as a Pension it is taxed as follows:

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    If the deceased was over 60 at the date of death, the pension is paid tax free.
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    If the deceased was under 60 at the date of death, the pension is taxed at the child's tax rate less any Tax Free amount. A 15% Pension Rebate also applies to the Taxable Amount.

It is noted that a Pension can only be paid to a Child up to the age of 25. After that time they must take the remaining Super Benefit as a lump sum.

+ What are the implications of leaving my Super Benefit to any Child aged between 18 and 25 that is NOT Financially Dependent on you?

You can nominate any Child (including an adopted or step child) aged between 18 and 25 that is NOT Financially Dependent on you, to receive your Super Benefit on death as either a Lump Sum payment only. Where your Super Benefit is paid to any Child who is aged between 18 and 25 (who is NOT financially dependent on you) as a lump sum, the Taxable Component of the payment is taxed at 16.50%. It is noted that the Tax Free Component of the payment remains tax free. You cannot nominate any Child aged between 18 and 25 (who is NOT financially dependent on you) to receive your Super Benefit on death as a Pension Income Stream.

+ What are the implications of leaving my Super Benefit to any Child aged over 25?

You can nominate any Child (including an adopted or step child) over the age of 25 that is Financially Dependent on you to receive your Super Benefit on death as a Lump Sum payment only. Where your Super Benefit is paid to any Child aged over 25 (that is Financially Dependent on you) as a lump sum it is tax free to them. Where your Super Benefit is paid to any Child who is over 25 (that is NOT Financially Dependent on you) as a lump sum, the Taxable Component of the payment is taxed at 16.50%. It is noted that the Tax Free Component of the payment remains tax free. You cannot nominate any Child over the age of 25 to receive your Super Benefit on death as a Pension Income Stream.

+ What are the implications of leaving my Super Benefit to any Child Permanently Disabled irrespective of age?

You can nominate any Child who is Permanently Disabled (irrespective of age) to receive your Super Benefit on death as either a Pension or Lump Sum payment. Where your Super Benefit is paid to your Child who is Permanently Disabled (irrespective of age) as a lump sum, it is tax free to them. Where your Super Benefit is paid to any Child who is Permanently Disabled (irrespective of age) as a Pension it is taxed as follows:

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    If the deceased was over 60 at the date of death, the pension is paid tax free.
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    If the deceased was under 60 at the date of death, the pension is taxed at the child's tax rate less any Tax Free amount. A 15% Pension Rebate also applies to the Taxable Amount.
+ What are the implications of leaving my Super Benefit to any Person who was Financially Dependent on you?

You can nominate any Person who was a Dependent just before death to receive your Super Benefit on death as either a Pension or Lump Sum payment. Where your Super Benefit is paid to any person that was a Dependent just before death (ie relied on you for financial assistance) as a lump sum it is tax free to them. Where your Super Benefit is paid to any person that was a Dependent just before death (ie relied on you for financial assistance) as a Pension it is taxed as follows:

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    If the deceased was over 60 at the date of death, the pension is paid tax free.
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    If the deceased was under 60 at the date of death, the pension is taxed at the recipient's tax rate less any Tax Free amount. A 15% Pension Rebate also applies to the Taxable Amount.
+ What are the implications of leaving my Super Benefit to any Person with whom you had an 'Interdependency Relationship' just before death?

You can nominate any Person with whom you had an 'Interdependency Relationship' just before death to receive your Super Benefit on death as either a Pension or Lump Sum payment. An interdependency relationship between two people is where:

  1. they have a close personal relationship; and
  2. they live together; and
  3. one or each of them provides the other with financial support; and
  4. one or each of them provides the other with domestic support and personal care.

Note under the definition of 'Interdependency Relationship' if two persons satisfy the requirement of (a); but they do not satisfy the other requirements because either or both of them suffer from a physical, intellectual or psychiatric disability, then they are still classed as having an interdependency relationship. Further, two persons will not have an interdependency relationship if one of them provides domestic support and personal care to the other under an employment contract or a contract for services or on behalf of another organisation such as a government body.

Where your Super Benefit is paid to any person with whom you has an "Interdependency Relationship" just before death as a lump sum it is tax free to them. Where your Super Benefit is paid to any person with whom you has an "Interdependency Relationship" just before death as a Pension it is taxed as follows:

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    If the deceased was over 60 at the date of death, the pension is paid tax free.
  •  
     
    If the deceased was under 60 at the date of death, the pension is taxed at the recipient's tax rate less any Tax Free amount. A 15% Pension Rebate also applies to the Taxable Amount.
+ Can I leave my Super Benefit to my Estate (via my Legal Personal Representative)?

You can nominate your Estate via your Legal Personal Representative (this is usually the Executor of your "Will") to receive your Super Benefit on death as a Lump Sum payment only. Under this option your Super Benefit will be distributed in accordance with your "Will". Importantly, a Death Benefit Agreement cannot directly specify a person other than a spouse, child or someone financially dependent on you or with whom you have "Interdependency Relationship". Accordingly if you want to leave your Super Benefit to another person you must nominate your Estate via your Legal Personal Representative to receive your Super Benefit when executing a Death Benefit Agreement. Your "Will" in turn allow your Super Benefit to be paid to the specified person.

Where your Super Benefit is paid to your Estate (via your Legal Personal Representative) on death which in turn pays it to any person detailed above as a lump sum it will be taxed in their hands in the same way as if they had received the payment directly. Where your Super Benefit is paid to your Estate (via your Legal Personal Representative) on death which in turn pays it to any person NOT detailed above (eg friend, nephew, niece, grandchild etc) as a lump sum, the Taxable Component of the payment is taxed at 16.50%. It is noted that the Tax Free part of the payment remains tax free. You cannot nominate your Estate (via your Personal Legal Representative) to receive your Super Benefit on death as a Pension Income Stream.

+ Can I nominate to leave my Super Benefit to a friend directly?

No. If you wish to leave your Super Benefit to a friend or someone over 18 who is NOT a Spouse, Child, someone financially dependent on you or with whom you have an interdependency relationship, you must leave the Super Benefit to your Estate who can in turn leave the Super Benefit to the nominated pension through you "Will".

+ What are the benefits of leaving my Super Benefit as a Pension instead of a Lump Sum?

Executing a Death Benefit Agreement to pay a Pension instead of a Lump Sum (where allowed) to a nominated beneficiary has some specific advantages over paying a Lump Sum, namely:

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    Your Super Benefit will not leave the super environment on your death. This is very important because if it does get paid out as a lump sum, the Beneficiary may not be able to contribute it back into super given the Contribution Limits that apply.
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    All earnings and investment growth will continue to be tax free. If paid out as a lump sum and invested in the Beneficiaries name they will be taxed on the income and growth on the benefit received.
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    Importantly even if left as a Pension, the Beneficiary of the Pension will be able to cash out the benefit in full or in part as required. The tax implications of accessing a Pension as a Lump Sum will be the same as if the Super Benefit was received as a lump sum in the first instance.
+ How do I calculate the tax on lump sum payments where the lump sum is not tax free?

Where tax is payable on a Lump Sum Payment on death, the tax is calculated as follows:

Step 1: Determine the Tax Free Component of the Deceased' Super Benefit
Step 2: Determine the Taxable Component of the Deceased' Super Benefit
Step 3: The Total of the Taxable and Tax Free Components makes up the Deceased' Total Super Benefit
Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
Step 6: Multiply the Lump Sum received by the Tax Free percentage at Note 4. The result is Tax Free.
Step 7: Multiply the Lump Sum received by the Taxable percentage at Note 5. The result is taxed at 16.50%

Example:

Barney has a Super Benefit made up of a Taxable Component (usually from Concessional Contributions made to the SMSF by your Employer) of $400,000 and a Tax Free Component (usually from Non Concessional Contributions made by you from after tax income) of $100,000. This means Barney's Taxable percentage is 80% ($400,000 / $500,000) and his Tax Free percentage is 20% ($100,000 / $500,000). Barney has executed a Death Benefit Agreement, nominating his son, Barney Junior, who is 30 (and NOT Financially Dependent on him) to receive his Super Benefit on death. This means that 80% of the payment to Barney's son on his death will be taxable at 16.50%. This equates to a tax bill of $66,000 (ie. 16.50% x $400,000). Possible strategies to reduce this tax bill Barney could implement before his death are detailed here.

+ How do I calculate tax on Pension payments where the Pension is not tax free?

Step 1: Determine the Tax Free Component of the Deceased' Super Benefit
Step 2: Determine the Taxable Component of the Deceased' Super Benefit
Step 3: The Total of the Taxable and Tax Free Components makes up the Deceased' Total Super Benefit
Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
Step 6: Multiply the Pension Payment by the Tax Free percentage at Note 4. The result is Tax Free.
Step 7: Multiply the Pension Payment by the Taxable percentage at Note 5. The result is taxed at the Beneficiaries tax rate less a 15% Pension Rebate

Example:

Barney is 58 and has a Super benefit of $500,000. His Super Benefit is broken down into a "Taxable Component" of $400,000 (built up from Employer Contributions) and a Tax Free Component of $100,000 (built up from Personal Non Concessional Contributions). This means that 80% ($400,000 / $500,000) of Barney's Super Benefit is Taxable and $20% ($100,000 / $500,000) is Tax Free.

Barney has executed a Death Benefit Agreement, nominating his Spouse Roxy (also 58), to receive his Super Benefit on death as a Pension. On Barney's death (assuming he is under 60 at the time), Roxy will commence to receive a Pension Income from the SMSF. Roxy must access a minimum 4% of Barney's Super Benefit as a Pension that is $20,000. This means that 80% of the Pension will be Taxable (ie $16,000) and 20% will be Tax Free (ie $4,000) to Roxy. In addition Roxy is allowed a 15% "Pension Rebate" on the Taxable Component of the Pension further reducing the tax liability.

Assuming Roxy is on the 31.50% personal marginal tax rate she would be assessable on $16,000 at 31.50% resulting in $5,040 in tax. Given Roxy is also entitled to a 15% Pension Rebate on the taxable portion of the Pension of $16,000 (ie 15% x $16,000 or $2,400), the tax liability is further reduced to only $2,640. This means that Roxy pays tax of $2,640 on a $20,000 Pension Payment in the above example. After Roxy turns 60 the Pension Payments will be tax free.

+ How do I minimise Tax when my Super is paid to Beneficiaries on my death?

If your Super Benefit has no Taxable Component and is made up totally of a Tax Free Component, or you leave your Super Benefit to a Tax Free Beneficiary (eg your spouse, a child under 18, anyone financially dependent on you or with whom you have an interdependency relationship with), then your entire Super Benefit will be paid tax free to the your nominated beneficiaries.

Where part or all of your Super Benefit has a Taxable Component and you intend to leave your Super Benefit on death to someone other than your spouse, a child under 18, anyone financially dependent on you or with whom you have an interdependency relationship with (eg an adult child over 18 who is not financially dependent on you or a friend) then they will be taxed on that Taxable Component at 16.50%. Where this is the case, you can implement certain tax minimisation strategies may assist in reducing the tax burden on the Beneficiaries receiving your Super Benefit on death. These strategies can be found here.

+ What happens if I execute a Death Benefit Agreement leaving my Super Benefit to a Beneficiary who is deceased?

In the event the nominated Beneficiary in your Death Benefit Agreement is deceased at the time your Super Benefit is due to be paid to them, the benefit allocated to that Beneficiary will be paid into your Estate and distributed in accordance with your "Will". It is strongly recommended that you update your Death Benefit Agreement when a person that you have nominated to receive a portion of your Super Benefit dies. This will avoid any issues later on your Death.

+ Who replaces me as Trustee of my SMSF when I die?

When you die your "Legal Representative" (Executor of your Will) replaces you as Trustee. Your Executor will seek to appoint another Trustee to take your place as soon as possible. It is noted that your Legal Representative (as will all the Trustees) will be bound to distribute your Super Benefit in accordance with your Death Benefit Agreement.