SMSF Trustee Death or Incapacitation
While not a pleasant topic to discuss, it’s crucial for SMSF trustees to understand and prepare for what will happen when one or more of their members passes away. To ensure that control of the SMSF is left in suitable hands and that the correct superannuation from assets and contributions is paid, it is essential that more than the individual’s Will is in place, as it does not provide sufficient influence over finances held in super.
At its simplest, the process which follows the event of an SMSF trustee death is:
The last step is particularly important to SMSFs held by individual trustees as superannuation laws do not allow for self-managed funds to have a sole individual trustee. As such, in the case of an individual trustee SMSF held by a married couple, the passing of a spouse will require the trusteeship to be restructured in a timely manner (within 6 months) if the other member wishes the fund to continue.
Because of this additional requirement at what is already a stressful time, corporate trustee setups are often the preferred structure for SMSFs. As a corporate trustee is in effect a company, it cannot ‘die’ as such and so the restructure or forced wind up only needs to occur when no there is no appointed director among the members. All members can simultaneously sit as director and so the SMSF is able to hold an indefinite lifespan – unless all directors were to pass at once, such as with single member funds, but this would prompt the closure of the SMSF anyway.
Whether your SMSF is run by an individual or corporate trustee, it’s still important to understand key aspects of death benefit procedures to ensure your accumulated wealth and assets are distributed as the deceased parties intend.
Binding Death Benefit Nomination
A Binding Death Benefit Nomination (BDBN) is a document that instructs the SMSF trustee how you wish for your super to be dealt with following your death. A BDBN is legally binding and its wishes must be adhered to, providing that the creation of such a document was allowed for in the SMSF Deed, and that the beneficiaries meet other superannuation laws.
For example, your super death benefit can only be paid to your estate or to close family members (ie spouse, children or financially dependent individuals). Remember that only a spouse or children under the age of 25 can receive a death benefit as a pension.
However, there can be complications that arise even when a BDBN is in place. The document may have been drafted when the fund was first opened and not reviewed since, meaning its contents may no longer be applicable to your situation when you pass. This is particularly problematic in the case of divorce and remarriage if it is not updated to include your current spouse, which could see them cut off from your super.
Other common mistakes that can undo the effectiveness of BDBNs is having contradictory wishes to other death arrangements specified in your SMSF, such as with reversionary pensions. If, at commencement of a pension, you indicate for this payment to be forwarded to your surviving spouse, but your BDBN directs a death benefit payment to your estate there is no clear instruction as to how the benefit should be paid,
Like with any legal documents, it is best to draft a BDBN in discussion with a qualified financial planner to ensure the most appropriate direction of superannuation funds following your death.
Legal Personal Representatives
In situations where no BDBN is in place, particularly in single member funds, it may be required that a legal personal representative (LPR) acts as an alternate trustee of the deceased SMSF member. LPRs are likely to be Will executors or those holding power of attorney in the event of incapacitation, however it is worth noting that they do not automatically assume the deceased member’s place within the SMSF.
These successor trustees must be formally nominated prior to the member’s passing and the SMSF Deed must allow for this to occur. If approved, the LPR will act as a temporary trustee of the SMSF to oversee the distributions of funds as per the deceased’s wishes. Once the interim payment of the death benefit has been released, the LPR will resign as trustee unless stipulated that they were to remain a member.
Following the payment of death benefits, the SMSF must restructure its trusteeship (if required to meet SIS requirements) no later than six months after the member’s passing.
Lump Sum Payment Requirements
Payment of death benefits, either as a pension, lump sum or combination thereof, is a requirement of all SMSFs. Under super legislation, this must be done ‘as soon as practicable’ following the event of a member’s death, however there is no specific definition as to how long this time frame should be.
The ATO generally expects that this should take no longer than six months, but it is understood there can be acceptable reasons for delay, such as:
- Trustee deliberation
- Locating nominated beneficiaries
- Legal disputes
- Valuing assets
There are also requirements around how the deceased’s super is distributed to the beneficiary, in that it cannot be paid in more than two lump sums per account. For example, if the deceased member had a single accumulation account but three pensions, then this could be paid as eight lump sums – two from each account.
The first payment – the interim amount – is the amount of value known at the time of the member’s death, and a final payment can then be made to accommodate any funds that were still being determined (ie updated valuation of assets) and can help avoid delays in progressing with the death benefit pay out.
Pensions are not subject to the same limitations and therefore any number of pensions could be started for eligible persons, which only includes beneficiaries who are the deceased’s spouse or children under 25 years of age.
Paying death benefits or navigating the management of your SMSF following the death of a member can be a complicated process and it’s advised to seek support from a specialist SMSF team.
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