How does a superannuation proceeds trust work?

A super proceeds trust that is compliant with the necessary laws and is accurately set up can minimise the taxes your dependants would owe when they receive your super death benefits in some situations. 

Setting up a superannuation proceeds trust could have some tax advantage. If the beneficiary of your superannuation trust is your dependant as defined by superannuation laws, they can generally receive the payments without any tax implications if the trust is in the form of a lump sum.

However, an income stream may or may not be taxable. If the dependant is 60 years or older at the time of the death of the deceased, an income stream is generally tax-free. But if the dependant is not yet 60 or the deceased passed away before turning 60, a part of the income stream may be taxed. 

It’s also worth noting that the definition of dependants varies between super laws and income tax laws. If the beneficiary of your super proceeds trust doesn’t fall into the category of your dependants as defined by super laws, the payment they receive is likely to be taxable. 

The difference in the way dependants are defined and how the proceeds are taxed for dependants and non-dependants makes the process of setting up a super proceeds trust quite complicated. It’s advisable to consult your lawyer and tax advisor when drafting the clauses in your will relating to your super death benefits to avoid any confusion at a later stage.

Yes, it’s possible to access super death benefits without a super proceeds trust. However, in this case, the beneficiaries receiving the benefits would have to deal with the tax implications themselves or risk losing access to the benefits. 

As per super laws in Australia, when a super fund’s management is informed of the death of one of their members, they can transfer the super death benefits to the beneficiaries nominated by the deceased person. 

If no one has been nominated, the benefits may be paid to the legal personal representative or the person executing the deceased person’s estate, and they can split the benefits as per the instructions in the will. 

Note that the beneficiaries nominated to receive super death benefits can be binding or non-binding nominees depending on the super fund’s rules. If only non-binding beneficiaries are nominated, the super fund trustee can decide whether to transfer the benefits to these beneficiaries or the legal personal executive. 

If you want to leave your super to someone who is not a dependant according to super laws, you may want to contact your super fund provider to make a binding death benefit nomination in their favour. Only some super funds allow you to make binding death benefit nominations. A legal professional can help you draft your will accordingly if you can’t nominate a non-dependant with your fund to receive your super benefit directly.