Estate Planning Basics – Superannuation Proceeds Trust

With Superannuation forming a large part of the asset base of Australians, the passing of accumulated Superannuation Death Benefits (particularly when supplemented with any Life Insurance contained within a Super Fund) is becoming an important issue in terms of the Estate Planning for Australians.

As noted in our previous up-dates, unless there is a Binding Death Nomination signed with a Trustee of the Super Fund, the Trustee will be required to make their own determination as to who receives the Superannuation Death Benefit. This article deals with the issue of when a Super Trustee elects that a child of the deceased is to receive the Death Benefit and the importance of creating a proper Superannuation Proceeds Trust.

Where a Trustee of a Super Fund makes an election that a child is to receive the Superannuation Death Benefit (in whole or in part) the Trustee will usually require that there be evidence of a Trust in place.

This article assumes that the deceased parent either did not have a Will (known as intestate) or had a basic Will without a trust component.  In either of these scenarios the Superannuation Trustee will require You to prepare a Superannuation Proceeds Trust.

What is a Superannuation Proceeds Trust?

A Superannuation Proceeds Trust is a legal document which creates a framework for a person (the trustee) to hold and manage the superannuation monies for the benefit of a nominated person (called beneficiary). 

The usual rules that concern the drafting and operation of a trust apply. However, the unique features of a Superannuation Proceeds Trust are as follows:

  1. The Superannuation Proceeds Trust can only be set up in circumstances after the relevant person has passed away leaving death benefits in their superannuation fund;
  2. The death benefit must be transferred directly by the Superannuation trustee to the fund as a lump sum; and
  3. The beneficiary must receive the balance of any monies held in the Superannuation Proceeds Trust upon reaching the age of 18.

 What Are the Tax Benefits of a Superannuation Proceeds Trust?

The monies held in a Superannuation Proceeds Trust are usually applied for the care, welfare and advancement of the beneficiary until they reach 18 years.  Where the beneficiary is young, the trustee of the Superannuation Proceeds Trust will more than likely need to invest the monies (or at least hold the monies in a term deposit) and thus earn income.

Under Section 102AG(2)(c)(v) of the Income Tax Assessment Act, 1936, income generated by property held in a Superannuation Proceeds Trust is deemed “excepted trust income” and therefore taxed at the normal tax scale (including the Tax-Free Threshold).  This contrasts with “non” trust income paid to a minor (being a person under 18 years) which will be taxed at penalty rates of 49.5% in the dollar.

Take Home Message

The above arrangement applies in circumstances where no Will or Estate Planning was in place in relation to the deceased. A better scenario is for either a Binding Death Benefit Nomination be lodged with the trustee (which controls who receives the death benefit) and/or to properly draft Will which incorporates a testamentary trust element.

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.

About Heath Adams

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.