What is a superannuation proceed trust?
This VLOG explains the key things you need to know about superannuation proceeds trusts and how they are established both proactively in a will and post-death.
Hi. It’s Tara Lucke here. So, in my Facebook group, The Art of Estate Planning, I had some questions come up from some of the advisers in my network about what exactly is a superannuation proceeds trust. So, this vlog is going to cover off what a super proceeds trust is.
Super proceeds trust is not necessarily a technical term. It’s a colloquial term for a testamentary trust set up just to hold superannuation proceeds. Now, there’s actually two different types of superannuation proceeds trusts. So, the first one is a superannuation proceeds trust that is planned for in the will before death, a bit like a normal testamentary trust and it’s just set up to hold the superannuation proceeds.
The second type is a post-death superannuation proceeds trust. So, that is a trust set up after someone has died to receive superannuation proceeds. So, they’re a little bit different. But they have one common feature between both types, and that is the range of beneficiaries of the trust, so the people who can actually receive the benefit from the trust is limited to people who are tax dependents for superannuation proceeds under the tax act. Okay? So, it’s a narrower range of beneficiaries than a normal testamentary trust.
And the whole reason you would use a superannuation proceeds trust is so that superannuation proceeds can come into that trust environment, but still receive tax-free treatment. So, you can look through the superannuation proceeds trust to the ultimate recipients, and if those ultimate recipients are people who could have received the superannuation tax-free, then you will get tax-free treatment on the receipt of the lump sum of the superannuation proceeds. But it’s still held in a trust, not in an individual’s name. So, particularly if you’re looking at upfront the estate planning, you get much better asset protection advantages on the superannuation proceeds.
So, let’s talk about the more common type, which is the testamentary trust upfront planning type of superannuation proceeds. So, there’s a couple of ways people draft those. The one that I’m most familiar with and that I personally advocate is crafting it in a way so that in the will, there’s a testamentary trust and then there’s a power for the executor to declare a sub-trust which is a superannuation proceeds trust. So that when the estate and the testamentary trust receives a superannuation proceeds, the executor and trustee can declare that they are actually holding the superannuation proceeds on a separate sub-trust for a narrower range of beneficiaries.
So, out of the entire beneficiaries of the testamentary trust, that actually limiting those superannuation proceeds funds just to people who are tax death benefit dependents. And that means you can trace the superannuation through, tell the tax office that it’s only limited for death benefit dependents and the superannuation proceeds sub-trust can receive those superannuation proceeds tax-free. The other way that people do it is to actually set up a separate trust in the will, so you’ll have the main testamentary trust and then a separate defined superannuation proceeds trust. So, that’s clearer. You could definitely go and have two trusts, it’s not as much of a sub-trust. It’s just a separate trust.
I personally prefer the sub-trust option because you get more flexibility to decide at the time if you need it or not. So, that’s particularly relevant where you’ve got beneficiaries who might be children who could be dependent children under 25 or under 18. But then they might end up being over 25 and no longer tax dependents for superannuation proceeds purposes, so you don’t need the sub-trust.
The second type that I talked about is the post-death superannuation proceeds trust. Now, don’t be lulled into a false sense of security. These are not as good as the first type of the proactive planning superannuation proceeds. Okay? There’s restrictions on who can ultimately receive the capital of the superannuation proceeds. Historically, there has been some tax uncertainty about how you actually get the super fund to pay the super proceeds into the hands of the trustee of the superannuation post-death trust because it’s actually not an eligible recipient. Like it’s not a legal personal representative, It’s not a dependent. So, you’ve got a little bit of a nexus there.
The ATO has recently come out with a ruling or determination to say that they’re okay if that nexus is a little bit clunky and they’ll still award you that treatment. But there’s certainly a lot of issues, particularly around underlying minor beneficiaries having to become absolutely entitled when they reach maturity, which you don’t have with the upfront superannuation proceeds trust.
So, they’re very valuable if you are making a will or you’ve got clients who are making a will that does not provide for superannuation proceeds trust. You need to look into that. You really ought to have one if there’s a chance of the superannuation proceeds coming into the estate and it could be held for death benefit dependents and you want the asset protection and tax treatment advantages of a testamentary trust.
I hope that clears things up about the superannuation proceeds trust. If you’ve got any questions, please feel free to reach out to me. I’m always happy to go into more detail. That’s it for now. Have a great day.