Nick Bruining: Who can (and can’t) get their hands on your superannuation fund when you’re gone

It’s a scary thought, but tick the wrong box on a simple form and your loved ones could end up paying tax or losing valuable government benefits.

Few of us understand exactly what happens to our superannuation funds when we die. In many cases it is the biggest liquid asset we have.

Even modest balances can be increased dramatically when life insurance proceeds are added to the fund after death. In an instant, a few thousand dollars could become several hundred thousand.

It may come as a surprise but a taxed superannuation fund does not normally form part of your estate. That means the instructions in your will don’t usually apply to your retirement savings.

Superannuation funds are held in a type of trust. The trust’s primary purpose is to provide for your retirement, but in the event you don’t make it to retirement the money is then available to your dependents.

If you leave no instructions to the trustees of your fund, they are legally required to distribute the proceeds to your dependents following strict superannuation rules. Sometimes the rules might not reflect your wishes and, in many cases, the wishes of your loved ones.

Many superannuation fund complaints are over how a super fund distributes the death benefits to dependents.

The simplest way to avoid this problem is to give the fund trustees explicit instructions about who gets what. The most secure way of ensuring your wishes are followed is to complete a “non-lapsing, binding death nomination”. You can get the required form from your fund with a phone call or download it online.

What’s really important to understand is that a super fund can never make a payment to someone who is not a dependent.

People sometimes named on a nomination form include friends or charities, but instructions to pay non-dependents must be ignored by the fund’s trustees.

You can, however, direct that the fund pays the entire proceeds to your estate, in which case the instructions in your will would take over. That way, the super can be distributed to whoever you nominate, including your friends, charities or anyone else.

A word of caution, however. It potentially makes an estate asset contestable by someone who thinks they have been short-changed.

The key difference between paying the money to your estate or directly to your dependents is how the proceeds are taxed, and this is where things become even more confusing.

In the world of superannuation, there are two types of dependents.

Under one piece of legislation— the Superannuation Industry Standards Act — the list includes spouses, children and anyone who is financially dependent or interdependent.

Under the Tax Act, dependents include spouses and financially dependent kids and individuals that are financial dependents or interdependent on the deceased.

A financially dependent child is likely to be one who is aged under 18 or perhaps a child who is living at home due to a disability.

It might seem a subtle difference, but the tax implications between financial dependents and others are significant.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association