Part 2: Individual trustees.
When all members of a self-managed superannuation fund (SMSF) die at the same time, what needs to happen next will depend on the structure of the fund.
In Part 1 we discussed the corporate trustee structure. Here we explain what happens to an SMSF with individual trustees.
It’s still essential to confirm that death has actually taken place and then key documents need to be located.
With individual trustees, the key documents are the fund’s trust deed and the Trustee Act in the State or Territory in which the fund is based.
When it’s unclear which member died first, it’s assumed that the older member died first. At this point, we need to tell the Australian Taxation Office (ATO) that the deceased trustees no longer fulfill this function because of death (there is an ATO form for this).
The ATO will want to know who now controls the fund. The initial response has to be that this is being sorted out according to the fund’s trust deed.
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Legal personal representative
We need to examine the fund’s trust deed to see if the deceased’s Legal Personal Representative (LPR) is automatically appointed as a director.
If this is the case, then we need to make sure the LPR can actually be appointed as a trustee and isn’t disqualified from being an SMSF trustee for some reason, for example an undischarged bankrupt.
Once the LPR has been appointed by the court after probate has been granted, or Letters of Administration have been issued, then they can be appointed as an SMSF trustee.
This appointment needs to occur according to the rules of the fund and the LPR would sign the ATO trustee declaration. The ATO need to be informed about the appointment.
If the LPR isn’t automatically appointed, then we can ignore these requirements.
Death Benefits Guardian (DBG)
Some SMSF trust deeds allow a DBG to be appointed. Some of the powers given to DBGs can be:
Consent to or veto how death benefits will be distributed
Consent to trust deed amendments
Obviously, you’ll want to carefully review your fund’s trust deed to work out if this applies to you.
Who appoints replacement trustees?
In the absence of the automatic appointment of a deceased’s LPR as a trustee, we need to see if the trust deed confers a power to appoint a replacement trustee. It may be that this power is given to the LPR of the last surviving trustee.
At this point, reference could be made to your SMSF’s State or Territory Trustee Act. For example, the NSW Trustee Act gives the LPR of the last surviving trustee a statutory power to appoint a replacement trustee.
This legislation also allows a court to appoint a replacement trustee. Clearly, this might be a safer option if managing the deceased’s affairs are controversial and you want to avoid future hassles.
For SMSFs with individual trustees, all fund assets have to be in the name of all trustees.
What happens now that all trustees are dead? Who controls the assets?
There are three potential issues here:
- Owned as joint tenants – ownership transfers to the younger trustee automatically; this means the younger trustee’s LPR controls and owns the fund’s assets. Their job is to protect the fund’s asset and, in time, transfer ownership of the asset when the fund’s replacement trustees are appointed.
- Owned as tenants in common – each trustee’s interest transfers to their respective LPR; these LPRs’ jobs are to protect and, in time, transfer ownership of the asset when the fund’s replacement trustees are appointed.
- Solely by one trustee and not the other (that is, incorrectly) – these assets are transferred to the deceased trustee’s LPR, whose job is to protect and transfer the asset at the appropriate time.
When the LPR doesn’t become a trustee
It’s important to realise that a deceased’s LPR doesn’t automatically become a trustee of an SMSF. This is a very common misconception, as the super laws allow for this but don’t mandate this rule.
As noted above, they can become a trustee but this happens because of a specific provision in a fund’s trust deed.
If the LPR isn’t a trustee, then they can’t exercise any SMSF trustee powers and have no rights under the trust deed.
Once the replacement trustee has been appointed, their requirements are very similar to those for a corporate trustee (see part 1).
I have long been an advocate for corporate trustees for SMSFs. Comparing what happens in multi-member SMSFs under both structures when all members die adds further weight to my argument.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.