What is a superannuation proceeds trust?
A superannuation proceeds trust is a type of testamentary trust established to receive superannuation proceeds on the death of a fund member. The trust can be established by your will or in some cases, by deed after your death. A superannuation proceeds trust is similar to other trusts set up in a will, but the money in it is limited to super death benefits, and beneficiaries are limited to your death benefit dependants. This is a complex area of Australia’s super and tax systems, so it could be worth seeking specialist legal and tax advice before deciding whether to set up a super proceeds trust.
How can you create a superannuation proceeds trust?
To create a superannuation proceeds trust, you will usually have to create a valid binding death benefit nomination in favour of your legal personal representative. This means your superannuation fund trustee must pay your death benefit into your estate, where it will be used to create the superannuation proceeds trust. Your will should contain special provisions and clauses to allow this to happen. If this is something you want to do, you may want to seek professional advice to help reduce the chance of your plans having unintended consequences, such as increased tax or potential beneficiaries missing out on receiving a payment.
If you don’t have provisions in your will, it can still be possible to create a superannuation proceeds trust by deed, but the rules are much more complex. For example, not every super fund’s trust deed supports setting up a superannuation proceeds trust in this way. Additional complications under Australia’s super and tax laws apply to a superannuation proceeds trust created by deed after a deceased member’s death, as opposed to one they create themselves in their will. You may want to check with your super fund about its approach to superannuation proceeds trusts.
If you are finding that your super fund is not offering you value based on your personal needs, you may also be considering different options that are available.
If you’re comparing superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.
Why might you set up a superannuation proceeds trust?
If set up correctly, superannuation proceeds trusts can potentially be useful in several situations, many of which are to do with tax and the degree of control over when and to whom a death benefit is paid. Some of the reasons a person might consider setting up a superannuation proceeds trust include:
1. Taxation
If beneficiaries of a superannuation proceeds trust are your death benefit dependants, they may be eligible to receive payments from the trust tax-free, regardless of the number of individuals who benefit from the trust (as would be the case if the death benefits were paid directly to the death benefit dependants as a lump sum, according to the Australian Taxation Office).
As with any testamentary trust, using a superannuation proceeds trust may help to minimise tax payable by minor beneficiaries. It’s a good idea to seek advice from a tax specialist about the considerations for your specific situation, however, because there are many factors that need to be taken into account.
2. Protection from creditors
If superannuation death benefits are paid directly from a super fund trustee to a beneficiary, this can potentially expose the payment to recovery by any creditors the beneficiary owes money to.
Placing a superannuation death benefit in a superannuation proceeds trust can provide beneficiaries with some degree of protection. Broadly speaking, creditors can’t make a claim for the money held by a trust, even if the beneficiary will eventually be entitled to it. This could be useful if, for example, one of the trust’s beneficiaries is in a high-risk occupation or is financially exposed. Similarly, if a beneficiary went through a divorce or similar relationship issues, their share of the benefit held by the trust would generally remain protected from, and inaccessible by, the other party.
3. Longevity and flexibility
There are several reasons why you may not want one or more of your tax dependants to receive their share of your superannuation death benefit immediately after your death. These reasons could include, but are not limited to:
- perceived immaturity
- vulnerability; for example, as the result of a disability or undue influence from others
- wanting the benefit to be paid at a significant point in your beneficiary’s life (e.g. on their 21st birthday)
- wanting their share of the benefits to accumulate in value before being paid to them
Comparing super funds can be a helpful step towards setting up what you’d like for the future, based on your personal needs and requirements.
Keep in mind that estate planning and trusts can be tricky legal instruments and shouldn’t be set up or arranged for without consultation with professionals such as a solicitor, accountant, tax agent and financial adviser, as well as your dependants.
Original author James Hurwood.
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