Estate planning essentials – what to do when a member of an SMSF dies

With Penny Pryor.

If a member of your self-managed superannuation fund passes away, it will likely be a very emotional time and sorting out your SMSF will be one of the last things on your mind. For the other members of the fund, however, it’s important that you give it some attention as soon as possible.

Here are the essential steps to consider when a member of an SMSF dies.

1. Update the ATO

When a member dies, the Australian Taxation Office (ATO) needs to be informed. If your fund has a corporate trustee, then the Australian Securities and Investments Commission (ASIC) also needs to be updated.

2. Amend the number of member trustees

As you’re no doubt aware, each member of an SMSF has to be a trustee and each trustee must be a member. 

Once a member dies, there will most likely be a mismatch between the number of members and the number of trustees, or trustee directors for a corporate trustee.  The super laws give you six months to fix this.

3. Determine who can distribute the death benefit

Whoever controls the super fund, i.e. the trustees, distributes the death benefit. The death of one of the trustees obviously leaves a hole.

The law allows – but doesn’t demand – that an SMSF will continue to be an SMSF if the deceased's legal personal representative (LPR) acts as trustee until the deceased's death benefits begin to be paid.

The LPR is the executor of the deceased’s estate and is appointed by a court when it grants probate or issues letters of administration, which may not happen until many months or even years after the death.

There are also separate issues relating to the structure of the fund.

Corporate trustees
Check the corporation’s constitution to determine if an automatic or voluntary replacement of a deceased director is allowed. If the replacement director is voluntarily appointed, there may be requirements in the constitution about who is, and isn’t, allowed to make the appointment.

The requirements of the fund’s trust deed also need to be satisfied so you have to work your way through both the corporation’s constitution and the trust deed.  

Individual trustees
If you have individual trustees, then your trust deed has to be followed with regards to the appointment of a replacement trustee. The next issue for remaining individual trustees is to ensure the fund’s assets are adequately protected and secured.

4. Determine the dependants

You then need to determine the deceased’s dependants for the purpose of distributing the death benefits.

Death benefits can only be paid to a person’s dependants or to their estate.

The ATO defines dependants for superannuation death benefits if, at the time of their death, they were:

  • their spouse or de facto spouse, including different or same sex
  • a former spouse or de facto spouse, including different or same sex
  • a child of the deceased under 18 years old
  • in an interdependency relationship with the deceased
  • any other person dependent on the deceased.

An “interdependency relationship” exists if two people have a close personal relationship, live together or provide each other with financial support or domestic support and personal care.

Adult children (those aged 18 years or over) are also dependants, although there are special rules. If they are 25 years or over, or between 18 years and 25 years and not financially dependent on the member, they can only receive a death benefit as a lump sum and they will be taxed at 15 per cent plus Medicare Levy on any lump sum.

Your trust deed may have extra stipulations around the definition of dependants as well. Dependants may not have to pay tax on a death benefit, depending on whether it is paid as a lump sum or a pension.

5. Confirm the deceased’s beneficiary nominations

A beneficiary nomination completed by the deceased will make things a whole lot easier.

If they haven’t nominated beneficiaries, then the trustees need to review the fund’s deed to make sure they follow the requirements on how and to whom a benefit can be paid.

There are typically two nomination types – one is called a binding nomination and the other is often called a non-binding nomination.

Either kind of nomination needs to have been drafted in accordance with the super laws and the fund’s trust deed, and needs to have been acknowledged as such by the deceased.

If a nomination is binding and valid, it has to be acted on as soon as possible.

As the name suggests, a non-binding nomination is not binding, so if the deceased’s wishes were expressed in such a form, your initial job is to decide if you will act on them.

If you decide to ignore the non-binding nomination, you will then effectively be dealing with a death benefit without a nomination and you’ll have to decide who is going to receive it and how.

If you accept the nomination, then your job will be to act on it within an acceptable timeframe.

6. Pay the benefit

Death benefits have to paid as lump sums or pensions. But they also must be paid in accordance with your trust deed, so check this document. Some older deeds only allow for lump sums, and pensions cannot be paid to adult children.

The super laws only allow for up to two lump sums but the same laws don’t restrict the number of death benefit pensions you can pay.

7. Keep good records

And finally, running an SMSF is all about good record keeping and this is especially important when a member passes away.

Easy access to up-to-date documents and trustee minutes can make the whole process a lot less painful for everyone involved.

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October 2021
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