Questions & Answers - Death

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 not 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 to 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 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 from 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 SMSF to pay the benefit to the nominated beneficiaries specified in the Agreement. Features of the Death Benefit Agreement are as follows:

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

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

A Death Benefit Agreement is Non Lapsing. That is the Death Benefit Agreement used by ESUPERFUND differs from 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 SMSF to pay the benefit to the nominated beneficiaries specified in the Agreement.

When you apply for a Death Benefit Agreement ESUPERFUND will send you two copies of the Death Benefit Agreement documentation. A copy of the Death Benefit Agreement documentation should be kept by you, the other copy should be kept by your legal representative who prepared your "Will" for you.

There is no additional cost to implement a Death Benefit Agreement with ESUPERFUND.

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

You can nominate your Spouse (includes 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:

You can nominate your former Spouse (includes De Facto and same sex couples) to receive your Super Benefit on death as a Lump Sum payment only. Where your Super Benefit is paid to your former Spouse as a Lump Sum it is tax free to them. You cannot nominate your former Spouse to receive your Super Benefit on death as a Pension Income Stream. 

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:

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.

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:

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.

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 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 17%. 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.

You can nominate any Child (including an adopted or step child) over the age of 25 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 17%. 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.

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:

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:

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 had 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 had an "Interdependency Relationship" just before death as a Pension it is taxed as follows:

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, allows 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 17%. 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.

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 pays the Super Benefit to the nominated person through your "Will".

Receiving death benefits as a Pension instead of a Lump Sum has its advantages and disadvantages - you may wish to obtain your own independent financial advice about this.

Advantages include: 

If paid to a nominated Beneficiary who is eligible to receive a pension (such as your spouse):

• Your Super Benefit will not leave the super environment on your death. This is important because if it does get paid out as a Lump Sum, the Beneficiary may not be able to contribute it back into super again given the Contribution Limits that apply.
• All earnings and investment growth will continue to be tax free. If paid out as a Lump Sum and invested in the Beneficiary's name they will be taxed on the income and growth on the benefit received.

The Beneficiary of the Pension can later cash out all or part of the benefit as a Lump Sum payment. The tax implications of accessing a Lump Sum from the Death Benefit Pension will be the same as if the Super Benefit was received as a Lump Sum in the first instance.

Disadvantages include:

• It requires the SMSF to continue - including the costs of operating the SMSF;
• It may result in the beneficiary exceeding their Transfer Balance Cap (and having to choose which pension they commute); and
• Death benefits can only be paid to certain types of beneficiaries.

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's Super Benefit
Step 2: Determine the Taxable Component of the Deceased's Super Benefit
Step 3: The Total of the Taxable and Tax Free Components makes up the Deceased's Total Super Benefit
Step 4: Calculate the Tax Free Component percentage equal to Step 1 divided by Step 3
Step 5: Calculate the Taxable Component percentage equal to Step 2 divided by Step 3
Step 6: Multiply the Lump Sum received by the Tax Free percentage at Step 4. The result is Tax Free.
Step 7: Multiply the Lump Sum received by the Taxable percentage at Step 5. The result is taxed at 17%

Example:

Barney has a Super Benefit made up of a Taxable Component (built up from Employer Contributions) of $400,000 and a Tax Free Component (built up from Personal Non Concessional Contributions) 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 17%. This equates to a tax bill of $68,000 (ie. 17% x $400,000).

Step 1: Determine the Tax Free Component of the Deceased's Super Benefit
Step 2: Determine the Taxable Component of the Deceased's Super Benefit
Step 3: The Total of the Taxable and Tax Free Components makes up the Deceased's Total Super Benefit
Step 4: Calculate the Tax Free Component percentage equal to Step 1 divided by Step 3
Step 5: Calculate the Taxable Component percentage equal to Step 2 divided by Step 3
Step 6: Multiply the Pension Payment by the Tax Free percentage at Step 4. The result is Tax Free.
Step 7: Multiply the Pension Payment by the Taxable percentage at Step 5. The result is taxed at the Beneficiary's 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), 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 bill. Assuming Roxy is on the 34.50% tax rate she would be assessable on $16,000 at 34.50% resulting in $5,520 in tax. Given Roxy is also entitled to a 15% Pension Rebate on the taxable portion of the Pension of $16,000 (ie 15% of $16,000 or $2,400), the tax bill is further reduced to $3,120. This means that Roxy pays tax of $3,120 on a $20,000 Pension Payment in the above example. After Roxy turns 60 the Pension Payments will be tax free.

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".

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.

A Death Benefit Pension is commenced in the SMSF when death benefits are received from the deceased in the form of Pension. A Death Benefit Pension is essentially a Simple Account Based Pension, therefore it is subject to the Transfer Balance Cap.

For more information on Death Benefit Pension, please click here.