Leaving Your Super To Your Children - The Tax Effective way and the .. Other Way.

Meet Helen

Helen was 65, recently retired, and thinking about what would happen to her assets when she passed away. As a single mother, she had worked hard to raise her two children, Ben and Sophie, and now wanted to make sure her superannuation—one of her largest assets—was passed on to them in the best way possible. She had saved diligently throughout her career and had an SMSF with a balance of $800,000. Her plan was simple: she wanted to split her super evenly between her children, giving them each $400,000 to help secure their financial futures.

Like many parents, Helen assumed that when she passed away, her super would automatically go to her kids. However, when she sat down with her Tax Agent, she was surprised to learn that superannuation doesn’t automatically form part of a will, and the way she structured her nominations could have a huge impact on how much her children would actually receive.

Helen’s Goal: A Simple 50/50 Split

Helen initially thought the easiest way to ensure Ben and Sophie received her super was to nominate them directly as beneficiaries in her SMSF. It seemed like a straightforward solution—she would simply list each child for 50% of her super, and when she passed away, the fund would distribute the money accordingly. But her Tax Agent explained that while this was legally allowed, it came with significant tax implications.

Under Australian superannuation law, only dependants—such as spouses, minor children, or people financially dependent on the deceased—can receive superannuation benefits tax-free. Because Ben and Sophie were financially independent adults, they were considered non-dependants under superannuation law. This meant that any taxable portion of Helen’s super would be subject to a 17% tax (including Medicare levy).

Helen hadn’t realised that superannuation is tax-free while you’re alive but can be taxed when passed on to non-dependants after death. Given that the majority of her super—$600,000—was made up of taxable components from employer contributions and investment earnings, this meant her children could lose a substantial amount of their inheritance to tax.

Option 1: Paying Super Directly to Her Children

If Helen went ahead with her plan to nominate Ben and Sophie as direct beneficiaries, they would receive the money quickly, avoiding estate processing delays. However, because they were non-dependants, the taxable portion of the superannuation payout would be taxed at 17%.

This meant that on the $600,000 taxable component, the tax bill would be $102,000 in total. Since she was splitting the super evenly, each child would lose $51,000 to tax, receiving $349,000 instead of the intended $400,000.

Helen was shocked. That was over $100,000 in tax that her children didn’t need to pay. It was clear that while direct nomination was simple, it wasn’t necessarily the most tax-effective approach.

Option 2: Directing Super to Her Estate

Helen’s Tax Agent showed her another option: instead of paying her super directly to her children, she could nominate her estate as the beneficiary and distribute the funds through her will. By doing this, she could reduce or even eliminate the tax burden on Ben and Sophie through strategic planning.

With this approach, her superannuation would be paid into her estate, allowing her executor to distribute it in a way that took advantage of tax planning strategies. One such strategy was setting up a testamentary trust, which could allow for more tax-efficient distributions, depending on the beneficiaries’ circumstances.

Another advantage of this approach was flexibility. If tax laws changed in the future, the estate executor could adjust how funds were distributed to minimise tax, whereas a direct nomination locked in the distribution method with no flexibility.

Comparing the Two Options

Helen had two choices:

• The Other Way: Name her children as direct super beneficiaries. This would allow for a quick and simple transfer but result in $102,000 in avoidable tax.

• The Tax Effective Way: Direct her super to her estate. This would allow for tax-efficient estate planning, potentially saving her children tens of thousands of dollars.

Given that Helen’s goal was to maximise what her children received, the estate option made more sense. She updated her SMSF nomination, naming her estate as the beneficiary, and worked with an estate planner to ensure her will directed the funds to Ben and Sophie in the most tax-efficient way possible.

What This Means for You

Helen’s story is a perfect example of why leaving super to your adult children requires careful planning. Many people assume that simply nominating their children as beneficiaries is the best approach, but without considering the tax implications, they could unknowingly reduce their children’s inheritance.

If you’re planning to leave super to non-dependants, you have two main options:

1️⃣ Direct nomination – This is the simplest approach, but the taxable portion of your super will be taxed at 17% (or up to 32% in some cases).

2️⃣ Estate nomination – By directing super to your estate and managing distributions through your will, you may be able to reduce or eliminate unnecessary tax.

The best choice depends on your circumstances, the tax structure of your super, and whether you want flexibility in how your estate is managed.

What Are the Next Steps?

If you’re leaving super to your children, here’s what you should do next:

• Review your SMSF beneficiary nominations. Are your children listed directly, or does your super flow through your estate?

• Consider estate planning strategies. If you want to minimise tax, make sure your will is structured correctly.

• Ask us Questions if you’re unsure. Superannuation and estate planning laws are complex, and a small mistake can lead to major tax issues later.

Helen’s small change saved her children over $100,000 in unnecessary tax—a decision that took only a few simple updates. If you haven’t reviewed your death benefit agreements in a while, now might be the perfect time to check that your nominations are still working for your family.