What is it?
A superannuation proceeds trust is a trust set up for a deceased’s estate to receive death benefit payment(s) from their superannuation fund following their death. This trust is commonly established in ones Will, but can be created after death by way of deed. More over, it nominates a beneficiary to receive the proceeds of a deceased individuals superannuation fund by way of trust.
A superannuation proceeds trust is a type of testamentary trust. However, beneficiaries to a superannuation proceeds trust are limited to those that are death benefit dependants (DBD). This is how this type of trust differs from others.
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What is a death benefit dependant?
Taxation law and superannuation law define death benefit dependants slightly differently. Division 302-195 of the Income Tax Assessment Act 1997 (Cth) defines DBD for the purposes of determining how the payment will be taxed. Accordingly, the criteria of eligible DBD’s include:
- spouse or de facto spouse
- former spouse or de facto spouse
- child under 18 years old
- financially dependent person to the deceased
- person in an interdependency relationship with the deceased
- Division 302-200(1) defines this as someone who has a close personal relationship, lives with, provides or receives financial support, domestic support, and personal care from or to the deceased individual).
Superannuation law’s criteria is more narrow, including:
- the spouse or de facto spouse of the deceased
- a child of the deceased (any age)
- a person in an interdependency relationship with the deceased.
The form of the payment, either an income stream or lump sum, also depends on the governing rules of your superannuation fund and relevant superannuation laws. Identifying and understanding these rules and laws can be complex. So, it’s highly advisable that you seek the advice from a professional for more specific information.
The benefits of a superannuation proceeds trust
There is a taxation advantage to establishing a superannuation proceeds trust. If the beneficiaries of your superannuation trust are your DBD’s, they are generally eligible to receive the payments tax-free. This depends on its form and either the age of the dependant or age of the deceased when they died. If the trust is in the form of a lump sum, it is not assessable income and is tax free.
An income stream payment method will be tax-free if the DBD is 60 years or older or the deceased died aged 60 or over. However, the tax-free components change if the DBD is younger than 60 or the deceased died aged under 60. In this scenario, the income stream will be subject to a taxable component, calculated using the proportioning rule.
Likewise, if the trustee to the superannuation proceeds trust does not fall under the category of DBD, known as a death benefit non-dependant, the payment will be subject to taxable components.
More so, complexities arise when superannuation funds have a different DBD eligibility criteria. Additional criteria to those defined above could affect the release of the funds to the trustee or beneficiary.
Final thoughts
Establishing a superannuation proceeds trust is generally a beneficial move to ensure your the proceeds of your superannuation end up with your dependants. Articulating this in your Will is important but also involves various intricacies. However, it’s also important that you are with the right super fund to ensure that your trust will come into effect with ease after your passing. To know exactly how a superannuation proceeds trust will benefit you and your beneficiaries speak to an estate planning lawyer or a trust lawyer.
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