What happens to your super after you die?

Most people don’t like to think about their death or how they would redirect their superannuation to best look after their loved ones when that happens. But obtaining financial advice while you’re still fit and well can help to structure your superannuation in the optimal way to achieve this end.

Superannuation is not an estate asset

It’s important to seek advice regarding superannuation benefits because it does not form part of a deceased person’s estate and won’t automatically be distributed as part of that person’s will.

In the absence of a valid beneficiary nomination, the trustee of the super fund will need to determine whether to pay the benefits to the deceased’s estate or their legal personal representative. Each of these choices can have different taxation consequences depending on the circumstances.

Superannuation death benefits

These benefits can be paid out as either a lump sum or an income stream to a dependent. But tax and superannuation law do not treat all dependents equally

Superannuation law only allows income streams to be paid out to certain dependents:

• a spouse (including same-sex and de facto spouses, but not a former spouse)
• a child under age 18 (including an ex-nuptial, adopted or stepchild)
• a financially dependent child under age 25
• a child of any age who has a disability
• other people financially dependent on the deceased at the time of death.

Death benefit income streams

Aside from situations involving a child with a disability, even if an income stream is payable, it can only be paid until a child is 25, at which stage it must be converted to a lump sum.

An important strategic aspect to be aware of is that as long as the income stream is converted to cash before the child turns 25, the remaining balance can be received tax-free.

Superannuation death benefits and income tax

After the death of a superannuant, the tax treatment of superannuation is complex and depends on:

• who is receiving the payment and his/her relationship with the deceased
• the recipient’s age
• whether the benefit is being received as an income stream or a lump sum
• the underlying components of the superannuation, which depends on when and how the contributions to superannuation were made.

Tax ultimately levied on death benefits can range from nothing to the top marginal rate, currently 45%.

Seek financial advice

Gaining advice as soon as possible may increase the amount of superannuation that your beneficiaries receive after you’ve gone, and reduce the amount that is diverted to the tax office.

Please contact us for more information.