When a member of a super fund dies, the balance in their fund (and any life insurance held by the fund) is usually paid to the super fund members dependants.
If you don’t have any dependants, it’s paid to your estate and usually dealt with according to what’s in your will or by the legal rules for those who die without a will.
- But what happens if you have stepchildren?
The problem of death taxes
Today many people use the money in their super fund as part of their estate planning and provision for their family, just in case.
So it makes sense to understand the special rules and regulations that control who's allowed to get your money from a super fund when you die.
Terry is a 46-year-old tradie with three sons;
- one aged 15
- one aged 16 and
- one aged 17
Terry's defacto of 12 years Jenny is aged 50.
Like all many tradies, Terry is very successful but time poor. After being repeatedly reminded by Jenny, Terry finally took out a life insurance policy one lunchtime with a telemarketer for:
- $1.5 million life insurance cover to protect his three sons and provide each a financial head start if he suffered a workplace accident and passed away.
Terry planned for Jenny to only inherit the family home.
Terry made two quick decisions without the help of a financial adviser his family would later regret.
- Terry decided to have his life insurance paid from his super fund - because it was cheaper that way, and
- Terry nominated his three sons, leaving each son 1/3 of the potential life insurance payout.
Sounds simple enough right? Sadly two years later, Terry did suffer a workplace accident and after a complicated head injury passed away.
Jenny thought she was to inherit the family home and each of the three boys would inherit 1/3 of Terry’s life insurance policy, about $500,000 a piece, held in Terry's super fund.
Terry died 2 years after the policy was taken out, so his three sons were all 2 years older when he died.
- Son now aged 17, received $500,000 from the death payout of Terry's super fund, tax-free.
- Son now aged 19, received only $415,000 from the death payout of Terry's super fund because he was forced to pay tax of $85,000.
- Son now aged 20, received nothing.
Why this happened?
At the time of Terry's death,
- Son aged 17 was a recognised tax dependant child of Terry and therefore entitled to receive the super death benefit payout of $500,000 tax-free. Son 17 was happy.
- Son aged 18 was considered a financially independent adult child, and his portion of the super payment was $415,000 because it was taxed at $85,000. Son 19 was not happy.
- Son age 19 was said to have ceased to be a child of Terrys (because his birth mother Jenny was a defacto with Terry, and Terry never adopted him as his own). Son 19 was particularly not happy and went and got himself a solicitor to explore his options. ATO ID 2011/77
At the worst possible emotional time in Jenny's life, she had to deal with losing her partner and significant financial tension between her three sons.
It's important to review your financial situation each year with your financial adviser so that these problems don’t happen to you and your family.
Regardless of the plans you have for the money and insurance in your super fund, the legal decision of whether your nominated beneficiaries are legally able to receive your money occurs at the time of death, not at the time of your original decision.
There are some things you shouldn't leave to a DIY decision - who gets your superannuation if you're a blended family is one of them.