Ask an Expert – Estate planning for life insurance held through super

National Technical Manager

David Glen

Most young adults assume that estate planning is an issue for retirees, wealthy business owners, or people with substantial investments. Many younger Australians already own a significant asset—their life insurance held through superannuation.

Often, young people do not consider who would receive the insurance proceeds if they died unexpectedly. This can create significant problems for families and loved ones at a time when they are already dealing with grief of sudden death.

Insurance inside superannuation is often a major asset

The insurance proceeds can exceed the value of everything else owned by the deceased. This means that the superannuation death benefit can become the most important asset in the estate planning equation.

Many young adults do not appreciate that superannuation does not automatically form part of their estate. The trustee of the superannuation fund is responsible for determining who receives the death benefit, unless there is a valid binding death benefit nomination directing the payment.

Who will receive the benefit?

Where a valid binding death benefit nomination exists, the trustee will pay the death benefit to the nominated beneficiary or beneficiaries.

However, where no valid nomination exists, the trustee will exercise its discretion. This process may involve identifying potential dependants, inviting claims, and assessing competing submissions before deciding.

The result may not align with what the deceased would have wanted. Importantly, delays can arise while the trustee investigates potential beneficiaries and resolves disputes. This can create uncertainty and stress for family members at a challenging time.

Parents are not always dependants

Many young people assume that their parents will automatically qualify to receive their superannuation death benefit. This is not necessarily correct.

Under superannuation law, parents can potentially receive a death benefit if they are dependants of the deceased member. However, once a young adult becomes financially independent, establishing dependency may become difficult.

A parent may still qualify if there is evidence of financial dependency or an interdependency relationship. These concepts are fact-specific and cannot be assumed.

For example, a parent and adult child who live separately and support themselves independently may find it difficult to establish the necessary level of dependency. As a result, a young person who intends their superannuation benefit to pass to their parents should not leave the matter to chance.

Tax can significantly reduce the benefit

Even where parents successfully receive a superannuation death benefit, another issue arises – taxation.

The Income Tax Assessment Act 1997 distinguishes between "death benefits dependants" and non-dependants. Benefits paid to death benefits dependants are received tax free. However, benefits paid to non-dependants may attract significant tax.

This can come as an unwelcome surprise. A young person may believe that they are leaving a substantial amount to a parent, sibling or other loved one. However, tax could reduce the final amount received.

Many adult children are financially independent from their parents. In those circumstances, parents may not qualify as death benefits dependants for tax purposes. The result can be a substantial tax liability on receipt of the benefit.

Accordingly, both the superannuation rules and the taxation consequences are important advice considerations.

The McIntosh case—a powerful warning

The most striking illustration of the dangers of poor planning is the Queensland decision in McIntosh v McIntosh [2014] QSC 99. The deceased was a man in his forties who died without a will and without valid binding death benefit nominations. His parents were divorced and had a highly acrimonious relationship. He had little or no relationship with his father. The deceased's mother lived with him and was accepted by the superannuation fund trustees as being in an interdependency relationship with her son. As a result, the trustees paid more than $450,000 of superannuation death benefits directly to her.

However, there was a complication. The mother had also been appointed administrator of her son's intestate estate. The Court held that, as administrator, she owed fiduciary duties to the estate beneficiaries. By pursuing the death benefits personally rather than seeking payment to the estate, she had placed herself in a situation of a conflict of interests. The Court required her to account to the estate for the death benefits she had received. Those benefits then became subject to the intestacy rules and were effectively shared between the mother and the deceased's father.

The outcome appears inconsistent with what many people would assume the deceased wanted. Yet it arose because appropriate estate planning arrangements were not in place.

Two Essential Risk Management Steps

The lesson for advisers is clear.

Many young adults own a valuable insurance asset through superannuation, but few have taken steps to protect it.

Two simple risk mitigation measures can dramatically improve certainty:

1. Maintain a Valid Binding Death Benefit Nomination
   A binding nomination directs the trustee as to who should receive the death benefit. Advisers should ensure that the nomination complies with both the superannuation fund's trust deed and applicable superannuation rules.

2. Have a Properly Drafted Will
   A will remains critical even where binding nominations exist. It provides a framework for dealing with estate assets, appointing executors, and coordinating the overall estate plan.

   The will and beneficiary nominations should be reviewed together to ensure they are consistent and achieve the client's desired outcomes.

   Advisers play a critical role in guiding their young clients through this complexity.

For more information, please do not hesitate to contact the TAL Technical Team at  AskAnExpert@tal.com.au.

Our answer is subject to the disclaimer below.

Disclaimer

The information contained in this article is general information only and is not intended to be legal, taxation or financial advice. TAL Life Limited, its related body corporates, and its representatives have not taken into consideration any individual’s personal circumstances, financial needs, or objectives. If any person is intending to act on the information contained in this article, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation, or needs before acting on the information. Persons acting on any matter covered in this article should seek independent professional advice on the application of that matter to their individual circumstances. In relation to any financial product referred to in this article, a copy of the Product Disclosure Statement should be obtained and read prior to making any decision regarding the acquisition that financial product.