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Death of a SMSF member

The death of a SMSF member can have far-reaching consequences for the trustees and/or the remaining members of a SMSF.

In fact, the latest Annual Report of the Superannuation Complaints Tribunal lists “Complaints relating to death benefit distribution” as one of the most common complaints. [1]

There are strict rules about managing a deceased member’s balance as soon as possible after death, and there are many variables to be considered.

Administering a SMSF without the correct structure in place when a member dies can lead to legal disputes associated with the payment of death benefits, insufficient funds available to meet required payments or the unnecessary payment of tax.

It’s vital to be prepared.

When it comes to administering a SMSF when a member dies, the only guarantee is that every situation will be different and require different actions. Our guidelines outline 8 key considerations.

#1 Death benefit nominations

While the deceased member may have a binding death benefit nomination in place, there is the potential for legal disputes if it is different to what is outlined in the Trust Deed.

A binding death nomination may be used to legally challenge what is included within the deceased’s Will, so it’s important to consider the SMSF in conjunction with the member’s overall estate planning requirements.

A binding death nomination does not have to lapse after three years in a SMSF.  Without one in place, the SMSF trustee has discretion as to how the deceased member’s balance can be paid out, irrespective of the wishes outlined in their Will.

#2 Insurance inside of super

The Government’s recommendation for the consideration of insurance with SMSFs means many members will hold life insurance within the SMSF. Upon the death of a member, the insurance payout will be paid into the SMSF and the trustee has to pay the proceeds out as a death benefit as with the remaining balance of the member’s account.  It’s important to note that if the deceased member does not have a tax dependant, there may be significant tax implications for the beneficiaries upon receipt of the insurance payout.  It is not always the best decision to hold life insurance through a SMSF.

#3 Changing trustees after death

If an individual trustee of a SMSF dies, it becomes necessary to change the legal ownership on all assets in the fund. It is also expected that a replacement trustee will need to be appointed within six months. Consideration of changing to a Corporate Trustee structure should be discussed as an option, depending on the age of the remaining SMSF member and potential issues of electing another non-member trustee. If the SMSF does not meet the requirement of changing asset ownership or electing a new trustee, it may no longer be deemed a SMSF.

#4 Payment of benefits: Who to? How? When?

Under SMSF Law, the deceased member’s balance should be paid out as soon as practical (usually within six months). With strict time requirements, it’s important to ensure that the SMSF has sufficient funds available to be able to make payments as they are required.

How the trustee will liquidate assets to make sure the deceased member’s balance is paid to nominated beneficiaries quickly, without adversely affecting the remaining members, will need to be taken into account. If the deceased member’s benefit is to be paid as a pension, the new $1.6 million general balance cap will also need to be considered.

Also, you cannot simply journalise a death benefit payment with subsequent contribution back into the fund. The death benefit must actually be paid.

#5 Capital Gains Tax in the fund

Upon the death of a SMSF member, assets which are sold to fund the pay out of the deceased member’s balance to nominated beneficiaries may be subject to Capital Gains Tax. Any capital gain received as a result of asset sales may be taxable (until the deceased member’s balance has been paid out). There are also different tax treatments depending on whether the deceased member was in receipt of a pension or was in accumulation.

#6 Death of a member where a fund has borrowings

Managing a SMSF with debt when a member dies comes with complexity. If a fund holds property which the fund needs to sell to pay a death benefit, it may cause liquidity issues for the fund. There are different strategies which may be applied depending on whether the death penalty needs to be paid as a pension or a lump sum, including using reserves, unit trust arrangements or insurance outside of super.

#7 Trust deeds

It is imperative that a trust deed is correctly prepared, in conformity with major updates introduced in 2010 as well as more recent clarifications. A review and upgrade of Deeds is vital to ensure you are operating within legal obligations, especially when enacting requirements associated with the death of a SMSF member.

#8 Seek specialist advice

The SMSF Expert are uniquely positioned to advise on all aspects of SMSF administration including Deeds and fund payments. The SMSF Expert was founded by Peter Johnson, a leading Australian SMSF specialist. Peter is a chartered accountant who has been a professional practitioner for more than 22 years.

If you would like assistance around administering a fund upon the death of a member, I encourage you to contact me on 0413 335 700 or email peter@thesmsfexpert.com.au

[1]  http://www.sct.gov.au/dreamcms/app/webroot/uploads/documents/Superannuation%20Complaints%20Tribunal%20Annual%20Report%202016-17%20-%20web.pdf (p26)