The best of both worlds: Superannuation Death Benefits Testamentary Trusts
Planning for what happens to your super is one of the biggest examples of why I tell clients they need an estate plan, not just a will.
Not all of your assets and entitlements are automatically included in your estate to be dealt with under your will, and your superannuation member entitlements on your death is a great example of this.
Individual legal and financial advice is required.when a client is making a decision whether to pay their super to a beneficiary directly via a Binding Death Benefit Nomination (“BDBN”) (or a Reversionary Pension), or to a beneficiary via their will.
I’ll share two examples now of why bespoke advice about your circumstances is always needed and where costly unintended consequences can occur:
• For example, if you decide to pay your super into your estate, this may be taxed starting at 15%, which will be unnecessary if the end beneficiary was also a SIS Act and Tax Act dependent and would not have paid any tax if they received it directly. Additionally, if an estate dispute arises your super may unnecessarily be included in the asset pool to satisfy claims against your estate. Where we anticipate litigation might occur after death, in our planning we typically want to “strip” the estate and keep as many assets out of what’s covered by the will (and therefore at risk of the dispute).
• However, if you pay super directly to a beneficiary (and bypass your estate) via a Binding Death Benefit Nomination if that beneficiary isn’t a dependent under the SIS Act, that nomination won’t be binding, and your beneficiaries will have the time delay and uncertainty of waiting for a trustee decision about how your super entitlements should be paid. If you want a non-dependent to benefit, the best way to do this with certainty is to pay it into your estate and then gift to those beneficiaries from the will.
There are many strategies or combinations of strategies about how your super should be paid on your death that your lawyer and financial planner can collaborate on to find the right strategy for you.
One of the lesser-known, but high value and impact strategies is to bring the super into your estate, and in the will establish what is known as a “Super Proceeds Trust” or “Superannuation Death Benefits Testamentary Trust” “SDBTT” to hold and quarantine that money from other estate assets, for distribution only for beneficiaries who are both SIS Act and Tax Act dependents.
What is a Superannuation Death Benefits Testamentary Trust?
It is a discretionary trust deed established in your will, very similar to a testamentary trust, the main distinction being that whilst a testamentary trust often has a very wide range of beneficiaries who can receive distributions from the trust, a super proceeds trust is limited to only people who were dependents under both the SIS Act and Tax Act at the time of death, and time the payment is received by the Superannuation Death Benefits Testamentary Trust.
A spouse (including a de facto partner) and minor children of the deceased are the two most common types of people who meet this definition.
By promising the ATO that the SDBTT will limit distributions and benefits to this class of people only, we are asking them to look through the trust structure and recognise that the end recipient is the same as if the money had of been paid to those Tax Act dependents directly from the super fund, and to apply the same tax-free treatment that they would have enjoyed on the member’s superannuation entitlements if the money had of passed to them directly via a BDBN.
Why use the structure?
Using this strategy as a way of making payment to a spouse means that an estate planning client can enjoy both tax-free treatment, and asset protection benefits with respect to their super.
Without using a SDBTT once payment of super is made to a spouse control over what happens next to those funds is lost. Because that money is now a personal asset of your spouse, and is at risk from all of the normal risk events in life.
If your spouse remarries, your super may form part of the asset pool of their subsequent relationship; which is problematic if they divorce and it is part of their property settlement. Or your spouse dies before their new partner. Even if your spouse has included your family in their will, or your children (if you are a blended family or have children together) their will could be contested by their new partner and your super monies would be part of the pool of assets divided in that estate dispute. In fact, the courts often give higher priority in such claims to the second partner over say, adult children.
If your spouse has an occupation that puts them at risk of being sued, or becoming bankrupt, having the super that you left them in a SDBTT will protect this money from these risk events.
It also lets you keep control over what happens to that super on the death of your spouse. This is especially a high priority for blended families, if an estate planning client wants their super to come back to their own biological children after the death of their spouse. When the spouse who was benefitting from the SDBTT dies, the funds remaining will be paid in accordance with the residual gifting clause of your own will, not your spouse’s (in my will document and version of a SDBTT).
I want one, what will my lawyer help with?
Your lawyer will work with your financial planner to consider all of the alternatives, and confirm that this is an appropriate strategy in your circumstances.
An example of where is would not be appropriate for example, is if using a SDBTT is too restrictive (for example, the trustees are someone else other than your spouse and they
have no control or say over distributions provided to them), and there are not enough other estate assets to provide your surviving spouse with a level of autonomy that is appropriate. In such cases a spouse might make a claim for further provision from your estate, which is always to be considered and avoided when we are using strategies that “rule from the grave”.
Once confirmed that the strategy is appropriate your lawyer can assist you to consider the variations to the SDBTT that you might include. Such as
• Making it optional or mandatory for your spouse to receive your super through a SDBTT or not;
• Whether your spouse should be the sole trustee of the SDBTT, or working with someone else as a check and balance to how the funds are distributed;
• Whether all of only part of your super entitlements should be paid to the SDBTT.
Finally, your lawyer or financial planner can then assist you to ensure that the strategy is legally binding by signing a Binding Death Benefit Nomination and kept up to date.
It really is a strategy that lets us have the best of both worlds, and is worth asking your advisors if it could add value to your estate planning strategy.
The information in this article is protected by copyright and is not to be copied or reproduced without express authority from the author. It is of a general nature and does not take into account your own financial objectives, legal circumstances or needs. You should consider your own personal situation and requirements before making a decision. If you have concerns or questions, please contact me.
Lucy Percy, Lawyer. Head and Heart Estate Planning. lucy@hhep.com.au