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A father of three died with almost $100,000 in unspent superannuation. His three daughters, two of whom had been cut out of his will, wanted it split equally between them.
His middle daughter was ultimately paid the entire sum – even though his will suggested the cash should go to charity.
The case highlights difficulties faced by will-makers in ensuring their unspent superannuation goes to their intended beneficiary, and the particular obstacles to leaving the money to charity.
The decision to give the money to the middle daughter was made by the Australian Financial Complaints Authority (AFCA), which handles complaints for most superannuation funds.
New research by University of Sydney Law School Associate Professors Natalie Silver and Ben Chen reveals AFCA often departs from the wishes expressed by a will-maker when resolving complaints about the distribution of a deceased’s super.
The authors analysed 269 AFCA decisions and found it distributed the super according to the will in 13 or 11.2 per cent of the 116 cases that discussed the will. The authority gives primacy to the interests of dependants, the authors say.
Super among Australians’ chief assets
Silver and Chen argue the law on distributing a deceased’s superannuation is unduly complex, and argue for changes that would make it easier for the money to be left to charity.
“Together with the family home, superannuation is now the principal source of wealth for most working Australians,” they write in a forthcoming Melbourne University Law Review paper.
Most Australians now die with the majority of wealth they had when they retired, including most of their super balance, according to a Treasury report cited by the authors.
Together with the family home, superannuation is now the principal source of wealth for most working Australians.
University of Sydney academics Natalie Silver and Ben Chen.
Australia’s compulsory superannuation system provides “a rich source of potential charitable bequests” that could unlock billions, they say, helping the government reach its aim of doubling philanthropic giving by 2030.
Super may not be covered by a will
Under the existing law, it is difficult for a will-maker to ensure who gets their superannuation when they die. This is because the pool of money is managed separately by a super fund trustee and does not automatically form part of a deceased’s estate.
Chen said the current situation was “unnecessarily complex”. Many of the problems would be resolved, he said, if there was a default rule that super funds should pay unspent superannuation to a deceased’s “legal personal representative”, which is typically their executor.
The executor would then distribute the funds according to the will, including to any nominated charities.
AFCA’s role
But super fund trustees are responsible for distributing the funds. They are not bound by the will and can only distribute the funds to a narrow group of people. AFCA handles complaints about how the funds are distributed, and in limited cases the Federal Court may hear an appeal.
The main way for a person to ensure their intended beneficiary gets their unspent super is to sign a document called a binding death-benefit nomination, which must be followed by most super fund trustees.
The binding nominations have significant limitations. Unlike a will, they expire after three years, although there may be a way to set up a “non-lapsing” nomination in some cases.
How charities are disadvantaged
In addition, only a small class of dependants, such as a spouse or child, or a deceased’s executor or administrator, can be named as beneficiaries in the binding nominations. Charities cannot be included, but nor can many individuals.
“The definition of dependant is quite narrow,” Silver said. It typically did not include parents, siblings or close friends.
The only way to direct the money to a charity is for a super fund member to name their executor or administrator in a binding nomination, and to include the charity separately in their will.
This two-stage process results in “unnecessary cost and complexity … in making a charitable superannuation bequest”, Silver and Chen say, and it disadvantages charities.
A tax applies when a charity receives superannuation through a deceased estate, which also acts as a disincentive. By contrast, when the money is paid to some dependants it is tax-free.
‘Not unique to charities’
“The obstacles that we identify in the paper in relation to charities are not unique to charities,” Chen said.
Restrictions on who can be named in a binding death-benefit nomination make it harder to leave the money to other beneficiaries, including many extended family members. The same two-step process would need to be followed.
The authors say two changes would help ensure more people left their unspent super to charity: super fund members should be able to name a charity directly in binding death-benefit nominations, and bequests to charities from unspent super should not be taxed.
They argue the changes would be cost-effective to the government and could accommodate the interests of dependants and other family members.
The daughters’ fight
In the case of the trio of daughters, the wishes of the father were far from clear.
He had lodged a nomination in April 2019 which said his middle daughter should be paid his unspent super in full. But that document was non-binding.
His will in October that year made more complex arrangements for this daughter that would have resulted in the super ultimately being paid to charity. He died months later in 2020.
AFCA, resolving a complaint, found it was unfair and unreasonable not to pay the sum in full to the middle daughter. The authority gave primacy to the father’s wishes in his non-binding nomination.
“Although his wishes as expressed in his will are not to be ignored, they are not to be taken as determinative,” it said.
Silver said the current rules for distributing a deceased’s unspent super were unworkable chiefly because the compulsory superannuation system had not been designed with inheritance in mind.
“It was designed to provide savings to be used as income during retirement,” she said. “But the problem is that now a lot of Australians are dying with the majority of their superannuation still intact.”
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