Why death, superannuation and inheritance are a tricky business

Superannuation payouts upon death can be delayed, heavily taxed and completely confusing. Here’s how to take back control.

Nest eggs are more complex when death and taxes are involved.

Superannuation funds have been under fire for delaying insurance claims and slow payouts of money to members, which is the last thing any distraught or grieving family needs.

However, there are some key rules that can be followed to speed up the process when it comes to death benefits and save tax.

Advisers often urge people to make a binding death benefit nomination, which sets out exactly where you want your super funds to go upon your death.

If you don’t have one, the super fund trustee has the power to decide how your nest egg is distributed once you’re gone.

These nominations typically last for three years then have to be redone, although some super funds offer non-lapsing options and self-managed super funds – where the member is the trustee – don’t have the three-year rule.

If you’re confused by superannuation rules, you’re not alone.

Like many things super-related, there can be complexity, but a binding death benefit nomination can deliver people peace of mind.

However, there are some rules about who the money can be left to, so advice is important.

Seniors who have their super in an account-based pension can set up a reversionary beneficiary nomination to keep their money flowing to their spouse after they die. Once again, seek advice on this.

Binding nominations don’t necessarily mean getting super out upon your death will be easy and quick for your family ­members.

My father died on August 29, and his money is still yet to be released by his industry super fund.

Another golden rule around death and super can be extremely tricky to follow but will potentially save family members tens of thousands of dollars in tax.

If you don’t have a spouse and your adult children are your super beneficiaries, the ideal move is to get your money out of super before you kick the bucket.

That’s because non-dependent beneficiaries – typically adult children – get taxed at 15 per cent on potentially a large portion of your superannuation.

This is Australia’s secret death tax, and it can shock many families if a parent dies suddenly.

A $500,000 inheritance from super can potentially be taxed at up to $75,000 before it gets to the kids.

Tax can be avoided completely if the parent withdraws their super before they die, because most withdrawals from super are tax-free after age 60.

However, while their money remains in the superannuation system as an account-based pension, the parent pays zero tax on earnings and capital gains.

This is what makes timing tricky, and advice important for people who are unsure.

It’s why there’s a rising interest in annuities and other income streams for seniors that do not end up charging super’s de facto death tax, and also why more parents are handing out early inheritances to help their children and grandchildren with house deposits and other financial giveaways.

Some people employ a recontribution strategy that involves withdrawing money from super than putting it back in as a tax-free component, although there are rules to navigate so professional advice is again a good idea.

Australia’s de facto death tax has created two types of super fund death beneficiaries – those whose parent knows they are dying and withdraws their super tax-free first, and those whose parent dies suddenly and the tax slug hits the kids. It’s crazy and complex, but that’s nothing new.

Originally published as Why death, superannuation and inheritance are a tricky business