Doug from Mornings chatted with Jason Featherby from Leeuwin Wealth about what happens to superannuation when a person passes away.

Partnered Recipients

Jason said that the first thing to consider is if the person is partnered.

” With a couple, when one member dies, it can go automatically to your spouse or de facto partner and vice versa. No problems, no tax. If you can go to a child under 18, anyone dependent on you.”

He said that there isn’t inheritance tax in Australia yet but we are heading down that path. If the deceased’s super ends up in the hands of a non-dependent. that person will pay 17% tax on the taxable portion of that super.

Jason explained that since John Howard came along, it’s now categorised in taxed or tax-free.

Government Funds

“If you work for the state government, and you’ve got a government fund, you can have an untaxed super fund, but we’ll just pretend everything’s taxed because most of us is taxable or tax-free,” he said. “So most of us retire with 100% taxable portion and no tax-free amount in super.”

Death Benefit Tax

Jason said that if a person is single with adult kids, those kids will have to pay tax in the event of that person’s death.

“That’s the death benefit tax. It’s a sneaky one. Not everyone’s aware of it, but there are some things to do to eliminate or at least minimize it.”

He said that if you claim a deduction for the premiums throughout your life before you pass away, when the life insurance is paid, it forms part of the taxable portion.

“If it goes to your spouse, no problem, but if it goes to your kids, big problem,” said Doug.

“They can be whacked with a big tax bill or taxes withheld, and they might not be aware of it. So I guess the job here is to make people aware that it’s out there.”

Dependents with Disabilities

“They come under the dependent or someone who is financially dependent on you. They receive your super, the taxable portion tax free. According to the super rules, they’re included as a dependent.

He explained that anybody under 18, someone who is financially dependent on you, such as a disabled child, is entitled to a tax-free superannuation.

Preservation Age

“For those that don’t know, once you hit preservation age at age 60 in Australia, you can access your super. At 65, working or not, you can access your super in full.”

Jason detailed the process of putting a recontribution strategy in place for anyone wanting to access their superannuation from that point.

“When you can access super, you can take money out of your super tax-free because you’re of age, preservation age, and up until the age of 75, you can actually recontribute that money back into super as a tax-free contribution.”

“So withdrawal re-contribution strategy for those, particularly between sort of 65 and 75, no brainer.”

He encouraged those approaching that age bracket to seek further advice that will assist them in their individual situation.

Is Pension Still Taxable After Death?

“Yes, so super, a pension or accumulation makes no difference. in terms of the taxable, tax-free components. Those components carry around, even if you change super funds. So yes, a pension is treated exactly the same upon death.”

Can I Nominate a Charity to be a Beneficiary?

“You can’t nominate a charity as a beneficiary of your super. So you would have to leave your super to your estate and then leave the estate or part of the estate to a charity.”

Jason encouraged anyone writing a will to get a lawyer to ensure the paperwork is legitimate so that it makes sense to a judge.

“Also, if there is a video of you explaining those reasons, that rationale, that’s powerful. At the very least, write in your will why you’re doing these things because then a judge has some hope of defending your wishes.”

Jason continued to encourage people to seek counsel over estate planning and anything more complex.

Trust Accounts

He also recommended setting up a trust for those with disabled dependents.

“A trust of some sort can protect your assets from those that might want to separate your child from them. An estate lawyer will be the best place to start.”

Jason concluded by saying that super doesn’t automatically pass to tax-free, so making small changes now can make a huge difference.

“And it doesn’t cost anything to put in place a strategy.”

Check out the full interview with Jason Featherby below.