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Superannuation is an important consideration for many Australians, providing a source of income in retirement. However, what happens to your super when you die is often misunderstood or overlooked.

There are many misconceptions about how your superannuation is distributed after you pass away, which can cause confusion and uncertainty for your loved ones.

In this blog, we will explore and debunk some of the common misconceptions surrounding superannuation and death.

We will also provide clarity on the rules and regulations that govern the distribution of superannuation after death, helping you to better understand what will happen to your super when you’re no longer around.

Myth #1 – Super is part of your estate

The most common misunderstanding that people have in relation to their superannuation is that it will be handled via their will and estate. This is simply not true.

Superannuation will only form part of your estate if it is directed there. This is the same regardless of whether you are part of Retail, Industry or self-managed super fund.

NB: there is a lot more to estate planning than just a Will!

Myth #2 – Super is tax-free on death

People generally aren’t aware of the tax consequences on super upon death. Whether tax is required to be paid [and how much] can vary significantly depending on the strategies you have put in place, who ultimately inherits your super and what process it has gone through to get to them.

In most scenarios, a spouse or minor child can inherit your super tax free. However, if your estate plans aren’t up to date and aligned with your changing circumstances, your super can go via your estate potentially incurring unnecessary tax along the way!

On the other hand, most adult children will pay a maximum rate of 17% on a death benefit received from their parent’s super.

Finally, there are often a lot of taxes that people forget about regarding super and death benefits. For example, Stamp Duty on a property transfer, capital gains tax within the fund and also potential taxes in relation to an insurance payout.

While not all tax on super death benefits can be avoided, with the right planning you can significantly reduce the amount that your loved ones have to pay!

Myth #3 – Everyone should have a binding nomination

A binding nomination does exactly that. It locks the trustee into paying out your super to a particular persons and in the form specified in the nomination.

This can be great, but it also can be disastrous depending on the individual’s circumstances at the time. There are many situations [especially for business owners and for people who have their own self-managed fund] where someone may be better off by allowing the trustee to have the flexibility to make a decision based on their overall circumstances at the time.

The most common example of when this occurs, when a relationship breakdown is in progress and a binding nomination hasn’t been updated. However, there are other common scenarios where asset protection hasn’t been considered for the beneficiary leaving them exposed to creditors.

All of which can be avoided with the proper planning and regular reviews of your situation.

Myth 4 – control of a self-managed super fund passes to your executor

Control of a SMSF can pass in many different ways, so if you are a member of a SMSF it is extremely important that you understand who will obtain control of your fund.

NB: Many lawyers do not cover off on the self-managed super fund component when looking at an individual’s overall estate plan. Combine this with Myth 1 and you may quickly discover that your wealth is not passing to the beneficiaries that you want it to.

As you can see, there are many myths floating around in relation to super and death. You could be making some serious estate planning decisions without really understanding the tax or estate planning implications for you and your loved ones.

There is no “one size fits all solution”, both super and estate planning are personal, and require personalised advice. So we urge you to review your existing superannuation affairs and consider whether you really understand who it will go to and how upon your passing.

General advice disclaimer

Megan Kelly is a Director at businessDEPOT

Business Depot Financial Planning BNE Pty Ltd ABN 27 644 561 400 and its advisors are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL No. 357306.

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.

About the author:

Megan Kelly is the Director of Super + Financial Adviser at businessDEPOT & helps her clients kick their financial and lifestyle goals.

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