Tips and traps with super

Wealth Management Insights

You have worked hard and accumulated a decent amount in your self-managed superannuation fund. Besides holding a cash component to pay the bills and your minimum annual pension, you have also built up other assets for your retirement.

These other assets include a $500,000 share portfolio and over a million dollars worth of farming land. When the survivor of your marriage dies the plan is for all of your farming assets to pass to your farming child and your non farming assets to pass to your other child who is married to a Melbourne lawyer. Wherever possible, you wish to avoid a will challenge and at the same time protect the family farm and provide the best options for your non farming child.

It is also your intention that both of your children will be executors of your will and therefore the succeeding trustees of your superannuation fund on the death of the survivor of your marriage.

You also understand that your superannuation benefits cannot be dealt with through your will, but instead usually by the actions of the trustees of your superannuation fund. You wonder whether it is possible to ensure that only your farming land held by the superannuation fund passes to the farming child.

You are advised that you are able to prepare a binding death benefit nomination which will bind the trustees to distribute certain superannuation fund assets according to your wishes. At the same time your binding nomination could direct your non farming child's superannuation assets into a testamentary trust which could have significant taxation and asset protection benefits for that particular child.

A binding death benefit nomination does not form part of your will and therefore cannot be challenged in the same way as a will can be challenged under state laws.

Another scenario we often see is the issues involved with blended families and superannuation assets. For example, both partners may have children from previous relationships, but in this case the male wants his superannuation benefits to eventually pass only to his biological children, after providing for his partner.

If we assume the male is over 55 and under 65, then he could convert his superannuation benefits to a transition to retirement pension that reverts to his partner on his death and then reverts by lump sum to his children only on the death of his partner.

This could be reinforced by a complementary binding death benefit nomination. Further, he may give his children a share of the control of the superannuation fund by being members of the fund.

Another potential issue with any superannuation fund, is where a surviving spouse enters into a bona fide domestic relationship shortly after the death of the previous spouse. If the former widow or widower was to die say within six months, then the surviving domestic partner would be deemed to be a dependent and would have a far greater entitlement to the superannuation benefits then any surviving children.

In other words, in most superannuation funds, the definition of a spouse does not refer to having lived on a bona fide domestic basis for at least two years or have a child of that relationship as stipulated in family law. Again there are ways of protecting the entitlements of your children in these circumstances.

Next time we will explore binding death benefit nominations in more detail. In the meantime, it would be worth asking, what would happen to my superannuation if I die tomorrow?

This information is not intended to constitute as advice.