Superannuation is often the second most significant financial asset accumulated over a lifetime (after real estate). For many Australians, it is their largest financial asset, particularly where life insurance is also attached.

Despite this, appropriate superannuation planning is often an afterthought or overlooked entirely, with many assuming that the balance of their super fund will automatically form part of their estate. Unfortunately, this can lead to unintended outcomes.

This article explores how the law deals with your superannuation after your death, the role of death benefit nominations and why making the right nomination is essential to ensure your wishes are carried out.

Unlike assets held in your personal name, such as real estate, savings or shares, which are typically distributed in accordance with your will, your superannuation is held on trust by the trustee of your super fund. It is regulated by the fund’s rules, the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations).

Because superannuation is held in trust, it does not automatically form part of your estate to be distributed under your will. Instead, the trustee of your super fund decides who receives your superannuation death benefit unless you have made a written nomination directing how it should be paid.

You can specify who should receive your super when you die by making either a binding or non‑binding death benefit nomination.

A binding nomination is a direction to the trustee of your super fund that they must follow, provided it is valid and the nominated recipient is eligible under the SIS Act and SIS Regulations.

Binding nominations for many superannuation funds are valid for three years and must be renewed to remain current and enforceable. If the nomination is valid, made to an eligible recipient and has not lapsed, the trustee is legally required to distribute your superannuation death benefit in accordance with your nomination.

A non‑binding nomination is typically non‑lapsing and allows you to express your preference. The trustee is not legally bound to follow your instructions and retains discretion to distribute your death benefit in accordance with the trust deed, the SIS Act and the SIS Regulations.

If you do not make a nomination, the trustee of your super fund will decide who receives your superannuation death benefits at their discretion.

A nominated beneficiary can include a dependant under superannuation law, being your spouse, child, someone who is financially dependent on you or someone with whom you have an interdependent relationship or your legal personal representative (the executor or administrator of your estate). You can nominate one or more beneficiaries, provided your nominations add up to 100% of your superannuation death benefit.

If you want to leave your superannuation to someone such as a parent, friend or sibling or to a testamentary trust, you can nominate your legal personal representative (LPR). On your death, your superannuation death benefit will be paid to your LPR to be distributed in accordance with the terms of your will.

Your will may then distribute your superannuation to someone other than a dependant, either by way of a specific gift or as part of the residue of your estate.

It is important to consider the tax implications of such a distribution, as a gift of superannuation to non‑dependants will be taxed at a higher rate than a tax dependant.

There is an important distinction between a dependant under superannuation law, who is eligible to receive a death benefit and a dependant under tax law, who is entitled to preferential tax treatment.

As noted above, a dependant under superannuation law includes:

• a spouse or de facto spouse

• any child, whether a minor or an adult

• a person in an interdependency relationship, being in a close personal relationship, living together and where one or both parties provide financial support, domestic support and personal care.

A dependant under tax law only includes:

• a spouse or de facto spouse

• a former spouse or de facto spouse

• a child of the deceased under 18 years of age

• a person in an interdependency relationship with the deceased; and/or

• any other person who was financially dependent on the deceased.

Tax implications vary depending on several factors, such as the tax‑free component of the superannuation interest, whether the beneficiary qualifies as a tax dependant and whether the benefit is received as an income stream or a lump sum.

For example, when a tax dependant receives a death benefit as a lump sum, the entire amount is exempt from tax. In contrast, if a non‑dependant receives a lump‑sum death benefit, tax will be payable.

You can start by reviewing your current nomination with your super fund. It is common for people to make a nomination assuming it will remain valid indefinitely or to assume that updating their will is sufficient to ensure their wishes are carried out.

It is advisable to review your estate plan every few years, particularly after significant life events or where circumstances change. This review should include considering your superannuation arrangements and ensuring they are consistent with your overall plan.

Typically, a binding nomination offers the greatest certainty, provided you ensure it remains current and is renewed every three years or whenever required by your fund.

If you are unsure about any aspect of your superannuation or estate planning, it is best to seek legal advice. While the rules can be complex, ensuring your superannuation is distributed appropriately is often straightforward when you have the right guidance.

Taking the time to plan now not only ensures your wishes are carried out but also spares your loved ones unnecessary stress and uncertainty during an already difficult time.