Respecting your wishes: A look inside superannuation death nominations

Consider this scenario: You're 32 years old.  A few years ago, after many years of saving, you moved into your first home, leaving your mum who had raised you as a single parent in your childhood residence.

You have signed a binding death benefit nomination giving your superannuation to your mum, but have not made a Will ... after all, who needs a Will at 32?!

Soon after, you meet a new partner who moves in with you - quickly. Then, just five months later, you pass away suddenly.

Who do you think would - or should - be left with your superannuation?

In this true scenario, the late person's super funds went solely to the new partner. The death benefit nomination failed because the adult member was not living with, or financially dependent on mum (or vice versa), and the new partner was financially dependent on him at the date of his death. Legally correct. Yet, some might say, morally questionable.

So, who decides who gets your super?

Superannuation and estate planning

In 2020, the Global Pension Assets study concluded that Australia's pension market is the most successful in the world, having increased by 11.3% per year over the last 20 years.

So, with all this retirement money growing in our funds, it begs the question: Where does any leftover super go when we pass on? Many Australians don't know superannuation is not included in their estate. Due to differences in tax compliance, superannuation is not considered an asset by law until you are of pension age. Your superannuation is held by the super fund in a trust structure governed by a lot of legislation. So, it needs to be considered separately in your estate planning.

Now that we know super needs to be delegated separately, how do we ensure it goes to the chosen person?

We should all complete and sign a superannuation death nomination form.

Who can be nominated as a beneficiary?

Even with a nomination, not everyone is allowed to receive your super balance upon your passing. To be considered as a possible beneficiary of your superannuation, the person must be considered a dependant - or have a financially interdependent relationship with you.

You can instruct the executor of your Will to distribute your superannuation to other people, even if they are not considered a dependant. But if this is your goal, it's always best to seek personalised legal advice to see what's possible.

Issues with superannuation death nomination

With super nominations, there's a lot of confusing legislation, and many issues can arise. Challenges with binding death agreements often result due to the individual's limited knowledge of superannuation rules, paired with a lack of follow-through from the superannuation funds.

Most superannuation funds won't even check the suitability of your binding death agreement until a claim is made on your super, by which point it's obviously too late.

Although the superannuation regime is subject to a sole purpose test (to support people in retirement and their dependents), many would argue that after death people should be entitled to direct their hard earned superannuation balances as they wish, and not be subjected to restrictions on the potential beneficiaries who may be eligible to receive the balance of funds after death.

Leaving your super to charity

Whilst it's a generous idea, under Australia's current regulations, you are not allowed to add a charity as a beneficiary in your superannuation death nomination.

Include a charity is one of many organisations lobbying the government to change this legislation through the Productivity Commission process currently going through parliament, allowing Australian DGR charities to be named in superannuation death nominations. If accepted, this proposal would enable Australian DGR charities to receive superannuation death benefits subject to a valid nomination.

As it stands, charities are not eligible to receive death benefits directly from a superannuation fund, as a charity will not meet the criterion of eligible SIS dependants.  The only method of effective charitable giving from superannuation would be to direct the death benefits to an estate and include a gift in the Will.

However, most superannuation death benefits passing into your estate are likely to be subject to a 15% tax, even if the ultimate beneficiary is a tax deductible gift recipient charity.

This position is to be contrasted with donations made while you're still alive, which are tax deductible. However, the proposed change would enable would-be donors to direct their super to a charitable organisation - by quoting the ABN and potentially linking it to the Australian Charities and Not-for-profits Commission (ACNC), enabling the fund to receive the money without the tax burden.

Recently, the Law Council of Australia (LCA) submitted a recommendation to the Treasurer for reforming the superannuation death benefit framework. The recommendations proposed aims to eliminate limitations on who can benefit from death benefits and if approved, this reform would allow charities to be included as beneficiaries of superannuation benefits.

Philanthropy Australia also identified, through polling of over 2500 people in Australia that 75% of the survey respondents agree with the option to leave as much unspent super to charity as they decide, without a tax penalty.

In response to the question, 'Australians should be able to give a simple instruction to leave to charity as much of their unspent super as they decide, without a tax penalty'.

Gifting your superannuation could change the world

Legacy Foresight's 2023 research on Australian attitudes towards leaving a gift to charity in their Will stated that bequests make up to 55% of the total amount of donations charities receive - up to $1.6 billion per annum. Even though it's hard to find a definitive figure (due to the lack of robust systems around reporting and probate processes), it does show that gifts in Wills is both a significant charitable support and a big growth area.

Australia has unprecedented wealth. Over the two decades leading up to 2040, $2.6 trillion will be transferred to the next generation. If just 5-10% of this wealth were donated to charity, it would generate $130-$260 billion, positioning Australia as a global leader in philanthropy. Our charities, both large and small, support millions of people every year across all areas of social and environmental efforts. Great philanthropy transforms societies by helping people in need and addressing significant challenges.

Allowing a nomination in superannuation enables supporters to easily provide a "future legacy" distribution for causes dear to them, reinforcing donor support and charitable intentions. Even a small portion of superannuation income designated to charity can significantly impact the causes that individuals cared about and supported during their lifetime.

Get your facts from trusted professionals

The reality is, when it comes to superannuation rules, things can get confusing - fast. Any time you make changes to your superannuation beneficiaries, you must consult an estate lawyer and your specific fund. While I understand why people often consider this unnecessary, many are surprised to find they have not clearly understood the parameters or the implications of giving through superannuation.

The same advice applies if you're attempting to add a charity as a beneficiary of your estate. Speak to the gifts in Wills team of the charity you wish to support. They will have valuable insights into how to maximise your gift's impact, such as how to minimise the immediate implications of capital gains tax on some estate assets.

At the end of the day, for so many people planning for the future is not only about supporting themselves, but also leaving a legacy for the people they love and the purposes they are passionate about. As the age-old saying goes "A society grows great when old men plant trees in whose shade they know they shall never sit."