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Issues of tax and inheritance can rear their head if you pass away without effective estate planning provisions in place; in some cases superannuation proceeds trust can be implemented to sort these matters out.
If you want your superannuation benefit held in a trust rather than being paid directly to a specific person or people, one option may be to set up a superannuation proceeds trust in your will.
A superannuation proceeds trust is a type of testamentary trust established solely to receive superannuation proceeds on the death of a fund member. The trust can be established by your will or in some cases, by deed after your death.
A superannuation proceeds trust is similar in operation to other trusts set up in a will, with one significant difference; to be tax-effective, the beneficiaries are limited to persons who were your death benefit dependants as defined by the tax laws. As explained on the ATO website, this list is slightly different to the meaning of ‘dependant’ under the super rules, and includes the following people:
Under the super laws, a super fund trustee generally has discretion to decide when and to whom to pay a death benefit. To create a superannuation proceeds trust, you will usually have to create a valid binding death benefit nomination in favour of your legal personal representative. This means your superannuation fund trustee must pay your death benefit into your estate, where it will be used to create the superannuation proceeds trust. Your will should contain special provisions and clauses to allow this to happen. It’s really important to get good legal advice if this is something you want to do, so your plans don’t have any unintended consequences such as increased tax or potential beneficiaries missing out on receiving a payment.
If you don’t have provisions in your will, it can still be possible to create a superannuation proceeds trust by deed, but the rule are much more complex. For example, not every super fund’s trust deed supports the establishment of a superannuation proceeds trust in this manner. There are additional restrictions under the superannuation and tax laws that apply to a superannuation proceeds trust created by deed that don’t apply to one created under a will. Navigating these rules can cause much more stress for your family compared to having the right provisions in place in your will before your death.
You should also check with your super fund about their approach to superannuation proceeds trust, and whether your super fund is providing you with the most value possible.
Superannuation proceed trusts can be useful in several situations, many of which are to do with tax and the degree of control over when and to whom a death benefit is paid.
As mentioned above, if beneficiaries of a superannuation proceeds trust are your death benefit dependants, as defined by the tax laws, the ATO states that they are generally eligible to receive payments from the trust tax-free. This is regardless of the number of individuals who end up benefitting from the trust.
This generally results in a similar tax treatment as if the beneficiaries had been paid the death benefit directly, but with a number of other benefits. For example, a former spouse may receive a tax-free death benefit from a superannuation proceeds trust, but cannot be paid directly by a superannuation fund under the superannuation laws unless they meet another definition of dependant. As with any testamentary trust, utilising a superannuation proceeds trust may help to minimise tax payable by minor beneficiaries. The ATO advises that a minor can be taxed at a rate as high as 66 cents on the dollar on some income; however income payments made to minors from a superannuation proceeds trust is treated as ‘excepted income’, meaning it will generally be taxed at adult marginal tax rates.
It’s a good idea to seek advice from a tax specialist about the considerations for your specific situation, because there are many factors that need to be taken into account.
If superannuation death benefits are paid directly from a super fund trustee to a beneficiary, this can potentially expose the payment to recovery by any creditors the beneficiary owes money to.
Placing your superannuation death benefit in a superannuation proceeds trust can provide your beneficiaries with some degree of protection. Broadly speaking, creditors can’t make a claim for a beneficiary’s share held by the trust. This can be useful if, for example, one of the trust’s beneficiaries is in a high-risk occupation or financially exposed to a large degree. Similarly, if a beneficiary went through a divorce or similar relationship issues, their share of the benefit held by the trust would generally remain protected from and inaccessible to the other party.
Longevity and flexibility
There are several reasons why you may not want one or more of your tax dependants to receive their share of your superannuation death benefit immediately after your death. These reasons could include, but are not limited to:
In most Australian jurisdictions, a superannuation proceeds trust can exist for up to 80 years – the exception is South Australia, in which a superannuation proceeds trust can exist in perpetuity. This means that the trustee can choose to delay the point at which the death benefit is paid to beneficiaries by up to 80 years following your death, although in most cases they would probably not choose to delay distribution for that long.
At the end of the day, estate planning and trusts can be tricky legal instruments and shouldn’t be set up or arranged for without consultation with professionals such as a solicitor, accountant and financial adviser, and of course, your dependants. And as mentioned, the first step in considering where your superannuation will go when you pass away should be ensuring that you’re with the right super fund to begin with.