01/10/2019

So you want to give your super death benefit to someone who is not your spouse, child or financial dependent? Perhaps it’s your neighbour’s son?  Jim Townsend knows how.

Fred and Wilma are pretty happy with their lot in life. Their young daughter, Pebbles, is a polite and kind little girl. They’re steadily paying off the mortgage on their family home in Bedrock, a town they love despite the fact that the Granite Tram project has been delayed and has gone over budget. Their pet Dino is extremely affectionate, sometimes to a fault. And they live next door to their best friends Barney, Wilma, and their young son Bamm-Bamm.

Bamm-Bamm has a kind soul, but he’s distracted and destructive. He has behavioural issues and special needs, and frankly the cost of raising young Bamm-Bamm is a strain on his parents. One night, after a particularly fierce bowling match, Barney admits to Fred that the family is living hand-to-mouth, and although they are capable of covering their living expenses now, they aren’t able to save very much money. Barney and Betty worry that one day, when they’re no longer around, Bamm-Bamm will have nothing to inherit and no one to help care for him.

Fred talks to Wilma and they agree that because their finances are so comfortable that Pebbles need not inherit their entire estate. Wilma suggests that they nominate Bamm-Bamm to receive their death benefits from the self-managed superannuation fund of which they’re both members. This would include any life insurance policies that may be in place.

“Hang on!” shouts their financial advisor Mr Basalt, when they ask him about the plan the next day. “Bamm-Bamm isn’t necessarily a SIS dependant. This may cause a problem.”

The Superannuation Industry (Supervision) Act 1993 lists three main categories of persons who may be classified as dependants of a deceased member. These are the deceased’s spouse, their child, and any person with whom the deceased shared an interdependency relationship.

S10A defines an interdependency relationship as valid if they share a close personal relationship, and they live together, and one or each of them provides financial support to the other, and one or each of them provides the other with domestic and personal care. There are exceptions for physical, intellectual or psychiatric disability, but Bamm-Bamm doesn’t qualify for the National Dolomite Insurance Scheme and hence isn’t eligible.

Although the Act’s definition is an inclusive one – meaning that theoretically dependants may include but are not limited to the above list – on the face of it, it seems that Fred and Wilma cannot nominate Bamm-Bamm, their neighbour’s son, to receive their superannuation death benefits.

“Not a problem,” says Fred smugly. “We can just nominate our estates to receive our death benefits, and then stipulate in our Wills that Bamm-Bamm is to receive that amount as a beneficiary.”

“That is an option,” says Mr Basalt cautiously. “Though your estate is more vulnerable to creditors than your superannuation is. How much is left on your mortgage?”

Fred gulps loudly.

Outstanding debts of the deceased are usually paid out of the estate. If Fred and Wilma tragically passed away together, and the property they own jointly still has a mortgage to pay, this amount will likely be taken out of their estates. Depending on the size of the debt, their superannuation may be needed just to ensure that Pebbles isn’t left homeless.

There is, however, a potential solution. Fred and Wilma both have life insurance policies bundled with their superannuation. S205 of the Life Insurance Act 1995 states that the money paid out on a life policy cannot be made available to pay the deceased’s debts unless the contract entered into for that debt expressly permits it.

Depending on the specific terms of their mortgage, the policy may not be accessible to the creditor. The policy would be paid to the superannuation fund, the trustee of which would pay it to the estate, the executor of which would then be free to pay it to the beneficiary without interference.

Mr Basalt explains to Fred and Wilma that they could leave their liquid, tangible and superannuation assets to Pebbles, in the knowledge that these are considerable enough to pay out any existing debts and still have enough left over to provide for her, whilst leaving their life insurance payout to Bamm-Bamm. It would be advisable to place this money into some sort of protective structure like a Testamentary Discretionary Trust, but this is a discussion for another time.

If Fred and Wilma live long enough that their life policy is no longer needed (as we all hope that they do), then Pebbles and Bamm-Bamm will be of an age where they are at least somewhat self-reliant and better able to look after themselves (not to mention that any current debts will likely have been paid out by then and their estate planning becomes simpler).

Make sure, as part of your estate plan, you understand which of your assets are accessible to creditors and which aren’t.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.