So your adult children think they automatically stand to inherit your super if you pass away? It's time to think again.
Many people think their super automatically goes to their loved ones tax-free when they pass away; but it’s not that simple.
Superannuation laws in Australia are often more restrictive than most people realise. Family members who are no longer financially dependent on you may even be forced to pay tax on any super monies they receive.
And to add insult to injury, that same beneficiary is then immediately exposed to other parties - like a Bankruptcy Trustee or Family Law Court claimant - who may wish to seize any remaining super funds for other purposes.
What's a super fund member to do?
You're about to enter the realm of the Super Proceeds Trust (SPT) that can help you avoid this calamity by making sure your super is only passed on in a tax effective way, while also protecting your beneficiaries from financial risks.
Thank goodness you have found Sapience.
Read in this article
Learn how to better manage your Future Super
A Super Proceeds Trust (SPT) is a special kind of trust that’s included in a Protective Will document that you can purchase through Sapience Financial.
It’s designed specifically to:
- receive your superannuation death benefits paid into your estate (including any life insurance payouts held inside your super fund) when you pass away, and then
- make sure those funds go to the right people in a tax-effective, and protected way.
The key word here is 'protected' so lets learn more.
A Quick Tax Reminder:
Do you have a Super Tax Dependant (at the moment?)
There are two legal criteria to meet if a beneficiary of a super fund wants to avoid the tax on a super fund payout. This is because only certain people qualify as both a dependent under both superannuation law, ie: as a ‘SIS dependent’ and under taxation law, ie: as a ‘tax dependent.’
- They include your spouse, your former spouse, children under 18, children between 18 and 25 who are financially dependent on you or someone with whom you are in an interdependent relationship with you at the time of your death.
- If your super goes to someone outside that group (such as adult children, another relative or a charity), the ATO may take up to 30% in tax.
This is why old fashioned provisions in an outdated Will that simply states: 'direct all and any of your super into a standard testamentary trust' with a broad class of potential beneficiaries, is not sufficient for a Protective Will. In such a case, there’s a real risk the tax-free treatment won’t apply, even if the money ultimately ends up with someone who is both a legal SIS dependent and tax dependent.
How does an Super Proceeds Trust (SPT) Work?
A SPT is a default part of every Protective Will document purchased through Sapience Financial.
A Superannuation Proceeds Trust (SPT), established in your Will, is a strategic way to ensure your superannuation death benefits are received tax-free by your loved ones. An SPT can lay dormant in your Protective Will document until its needed.
When activated, it works by funnelling your super payout into a dedicated trust structure, that can only benefit those who qualify as a 'dependant' under super and tax laws.
- Tax Effective: By limiting the beneficiaries in this way, the SPT protects the money from being taxed, saving your estate from a costly and unnecessary tax bill.
- Protective: It also provides long-term control, as a trustee you select will manage the funds on behalf of the beneficiaries.
- Protective: If a potential beneficiary is undergoing Family Law challenges or being chased by an aggressive bankruptcy trustee, (more common than you think) the funds can be withheld by the trustee and kept outside the hands of external parties who may try and seize whatever they can for their own ends.
In Australia, dealing with a person's super upon their death is an important part of estate planning, and it's often misunderstood that super just automatically forms part of your Will.
This is not the case. Speak with us today about building a Protective Will document.
Chart: Inherited Superannuation & Beneficiary Bankruptcy Risk Management
This chart outlines the advantages of using a Superannuation Proceeds Trust (SPT) over a standard super beneficiary nomination when a beneficiary is bankrupt or at risk of bankruptcy. The key issue is whether a bankruptcy trustee can legally capture the inherited superannuation funds for the benefit of the bankrupt's creditors.
| Aspect Compared | Standard Super Beneficiary Nomination | Superannuation Proceeds Trust (SPT) |
|---|---|---|
| Ownership of Funds | The beneficiary receives direct ownership and control of the funds upon payment. | The trust (a separate legal entity) receives and owns the funds. The beneficiary does not have direct ownership. |
| Exposure to Bankruptcy Trustee | HIGHLY CONTEXTUAL & RISKY If paid via the Estate: When super is paid to the estate and distributed via the Will, the funds become a standard inheritance ("after-acquired property"). They are fully exposed and claimable by the bankruptcy trustee. If paid directly to Beneficiary: A direct lump sum payment from the fund to a bankrupt beneficiary is generally protected. However, once received, the funds have no ongoing asset protection. | HIGH & ROBUST PROTECTION Super funds are directed via the estate into the SPT created by the Will. Because the trust legally owns the funds, the bankruptcy trustee cannot claim the trust's capital. The beneficiary's entitlement is discretionary, not a fixed asset they own. |
| Control over Funds | The bankrupt beneficiary has full control, which also means the bankruptcy trustee can assume that control. | Control lies with the trustee of the SPT (who should not be the bankrupt beneficiary). The trustee can make distributions for the beneficiary's welfare without the funds ever vesting in the beneficiary's name. |
| Bankruptcy Trustee's Claim | Can capture 100% of the funds if they are channelled through the estate. If paid directly, the initial lump sum is protected, but its subsequent use isn't. | Cannot capture the trust capital. The trustee can only potentially claim distributions that are actually paid out to the bankrupt beneficiary. The trustee of the SPT can cease payments if aware of such a claim. |
| Long-Term Asset Protection | None. Once the funds are received by the beneficiary, they are exposed to future creditors, legal claims, or mismanagement. | High. The trust structure protects the capital for the lifetime of the trust (up to 80 years) from the beneficiary's creditors, legal disputes (e.g., divorce), or poor financial decisions. |
| Illustrative Outcome | The deceased leaves their super to their son via their Will (i.e., payment to the estate). The son is bankrupt. The executor pays the $500,000 inheritance to the son. The son's bankruptcy trustee immediately claims the entire $500,000 for the creditors. The son receives nothing. |
Sources & Further Reading
- Superannuation Industry (Supervision) Act 1993 (Cth) s 10 - The primary legal definition of a 'dependant' for determining who is eligible to receive superannuation death benefits.
- ATO: Paying superannuation death benefits - Official guidance from the ATO explaining the different tax treatments for 'tax dependants' and 'non-dependants'.
- ATO: Tax on super death benefits - Detailed information on how super death benefits are taxed when paid as a lump sum or income stream, including rates for non-dependants.
- ATO Legal Database (Private Ruling) - An example of an ATO ruling that examines the tax implications when super benefits are paid to an estate and held in a testamentary trust with non-dependant beneficiaries.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
