Where Your Super Goes When You Die: Death Benefit Nominations Explained

Lots of people don't realise this: your will doesn't control where your super goes when you die. Super sits in a trust, separate from your estate. It goes where the fund's rules and your death benefit nomination say it goes, not what your will says. That's true whether you're in an industry fund, a retail fund or an SMSF. Get it wrong and your super can end up with the wrong people, or get slugged with a big tax bill that could have been avoided.

For everyone with super, the risk is the same: if you don't sort it out, your wishes might not be followed. For SMSF members there's an extra angle. SMSFs can give you more control than retail or industry funds—for example, binding nominations that don't lapse every three years, if your deed allows it. You can often structure death benefits in ways that save tax and make sure your super goes where you want. You just have to set it up properly.

Who can receive super death benefits

Super law doesn't let you nominate just anyone. The recipient has to be in one of two buckets.

First bucket: dependants. That word has a specific meaning in super. Your spouse counts (including de facto and same-sex). Your children count at any age. So an adult child is still a dependant for super even if they're not on your payroll. So is anyone who was financially dependent on you when you died, or in an "interdependency relationship" with you (living together in a close personal relationship with some level of financial or domestic support).

Second bucket: your legal personal representative. That's your estate. If you nominate your estate, the super gets paid into the estate and then your will decides who gets it. Handy if you want to leave super to someone who isn't a super dependant (a sibling, a mate, a charity). The downside is the money goes through probate and the tax treatment can be different.

You can't nominate a non-dependant directly. Nominate your brother and he's not a dependant? The nomination isn't valid. The trustee then gets to choose who gets the benefit. Might not be what you had in mind.

Types of death benefit nominations

Non-binding

A non-binding nomination tells the trustee what you want, but they don't have to do it. They have to take your wishes into account, but they can pay any eligible beneficiary they think is appropriate. That's what most retail and industry funds use by default.

So you get uncertainty. Straightforward case (married, no blended family stuff)? The trustee will usually follow you. Messier case (blended family, estranged kids, people at each other's throats)? The trustee might pay someone else. Disputes over super death benefits are common. Non-binding nominations give people plenty to argue about.

Binding death benefit nominations (BDBNs)

A binding nomination ties the trustee's hands. If it's valid, they have to pay the benefit to whoever you nominated. No discretion, no second-guessing.

The catch: a standard BDBN runs out after three years. Make one in 2020 and die in 2024 without renewing? It's lapsed. The trustee has discretion again. Plenty of people do a BDBN once and assume they're set. Then it expires and they're not.

Non-lapsing BDBNs (mainly SMSFs)

Most big funds can't offer this. SMSFs often can. If your trust deed allows it (and a lot of modern deeds do, or can be amended to), you can make a binding nomination that doesn't expire. It stays in place until you change it. No three-year refresh, no calendar reminder.

Non-lapsing BDBNs are what most SMSF estate planners aim for. You get certainty without the admin. If your deed doesn't allow them yet, amending it is usually straightforward. Worth asking your SMSF specialist.

Tax on death benefits

Who gets the benefit drives how much tax gets paid. This is where the numbers get serious. The gap between tax-free and taxable can be tens of thousands of dollars.

Pay the benefit to your spouse: tax-free, whether it's a lump sum or a pension. Pay it to a child under 18: tax-free. Pay it to someone who was financially dependent on you or in an interdependency relationship: tax-free.

Pay it to an adult child who wasn't financially dependent (which is most adult kids): the taxable component is taxed. At 15% plus Medicare levy (17% all up) if paid straight to them, or at their marginal rate if it goes through the estate. On a $500k balance where 80% is taxable, that's $68k in tax that wouldn't apply if it went to a spouse.

Recipient	Tax on taxable component
Spouse	Tax-free
Child under 18	Tax-free
Adult child (non-dependant)	15% + Medicare levy
Financial dependant	Tax-free
Estate, then dependant	Tax-free
Estate, then non-dependant	15% + Medicare levy

If you're in an SMSF: reversionary pension, re-contribution and estate

The next section is for SMSF members. The rest of this article applies to all super.

Reversionary pension

If you're on a pension from your SMSF you can nominate your spouse as the reversionary beneficiary. When you die, the pension just keeps going to them. Same pension, same terms. No lump sum, no restart. No tax. And for pensions that started before 1 July 2017 there's no Transfer Balance Cap event either.

For couples it's usually the cleanest option. The surviving spouse keeps getting the income. No paperwork nightmare, no tax hit. The pension just flips from one name to the other. Often better than taking a lump sum death benefit and then starting a new pension.

Re-contribution

Some people use a re-contribution strategy to shrink the taxable component before they die. You take money out of super as a tax-free pension (you're over 60), then put it back in as a non-concessional contribution. That new contribution is 100% tax-free component because non-concessional money is already after tax.

Over time you convert taxable to tax-free, so when a non-dependant (like an adult child) gets the benefit, less of it is taxable. You're limited by the non-concessional cap ($120k a year or $360k under bring-forward), but over a few years you can move a decent chunk. Whether it's right for you depends on your age, balance, who you're leaving money to and your overall plan. That's something to work through with an SMSF specialist or financial adviser, not something to do from a blog post.

Paying death benefits via the estate

If you nominate your estate, the super goes into the estate and your will says who gets it. That gives you flexibility (you can leave it to anyone), but the money goes through probate. That takes time and can mean executor fees. And if the person who ends up with it is a non-dependant, the tax still applies.

Estate nominations suit people who want to change beneficiaries by updating their will rather than their super paperwork, or who want super to be part of the overall estate picture rather than dealt with separately.