What to do when all SMSF trustees die (part 1)

The unexpected can happen at any time. Be prepared.

Part 1: corporate trustees.

The Malaysian Airlines tragedy reminds us that, despite our best endeavours, we live in a dangerous world where the unexpected does happen.

In the case of self-managed superannuation funds (SMSFs), there are three critical issues to consider when a member dies:
  • Who controls the fund
  • What succession rule applies to the death benefit
  • What powers are available to determine how a death benefit is paid
  • But what happens when all members die at once?

Multi-member corporate trustee SMSFs

When all members of an SMSF with a corporate trustee die, then the corporate entity survives the death of the directors (for individual trustees, the older trustee will be assumed to have died first).

On the death of a member, the first issue is to determine what constitutes a quorum for a director’s meeting. This will be contained in the company’s constitution. This may be necessary if the surviving directors (if any) can meet and appoint another director.

Next you need to work out if there are any automatic director appointment provisions in the trustee company’s constitution and similar provisions in the fund’s trust deed. These provisions aren’t common in off-the-shelf documents.

If a deceased’s Legal Personal Representative or LPR – typically their executor – is automatically appointed, then this can’t take place until the probate or letters of administration have been issued for the deceased estate.

If a person other than the LPR is specifically nominated as the replacement trustee, then the appointment doesn’t have to wait for probate or letters of administration to be issued.

Professional Development: Life insurance and SMSFs: learn how self-managed superannuation funds (SMSFs) can provide a compelling opportunity for structuring life insurance needs.

Note that if someone is appointed as a director at this stage, then the person must accept their appointment under the Super and Corporations laws and must not be disqualified under either of those laws. Upon appointment, the Australian Taxation Office (ATO) and ASIC both need to be notified.

If automatic director appointments aren’t a feature of your company’s constitution, then who are the shareholders of the corporation?

There are several issues here:
  • The deceased were shareholders – the deceased’s LPR will exercise the voting rights to appoint replacement directors (clearly this will be delayed until the LPR has been appointed) and using these voting rights could appoint themselves.
  • The deceased weren’t shareholders – then the shareholders can appoint the replacement directors.

The role of replacement trustees

The replacement trustees will need to:
  • Value assets to determine the size of the death benefit
  • Claim any death insurance proceeds
  • Determine if any anti-detriment death benefit augmentation (that is, return of contributions tax) can be made
  • Determine any succession rule applying to the benefit (for example, if a pension is to be paid then will another person receive that benefit if the initial pensioner dies?)

Need to know

And finally, in order to remain an SMSF, a fund must satisfy the trustee definition within six months of falling outside the various SMSF rules. This is a hard-and-fast rule and the regulators don’t have flexibility to extend this time.

If a fund ceases to be an SMSF, then it automatically is regulated by APRA. How do you pay out benefits from a fund where it takes more than six months for an LPR to be appointed, who is then the replacement trustee? At the very least, you would need to speak to the ATO about how best to handle this situation.

Multi-member SMSF with individual trustees

A number of other issues need to be considered here.

Read next: When all SMSF members die - individual trustees


October 2021
October 2021

Read the October 2021 issue of INTHEBLACK magazine.

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.