SMSF and death benefits: what are the rules?
There are strict rules that apply when one member of a SMSF dies, and it’s important to understand what these are if you are a member of an SMSF.
In the first instance, says David Palermo, certified financial planner, Capital Wealth Group, the accumulation balance must be dealt with by the trustees as soon as practicable. “The benefit must be paid in the form of a lump sum or an income stream or both to the beneficiaries,” he explains.
Under the Superannuation Industry (Supervision) Act’s rules, the death benefits can only be paid to a current spouse, either legal or de facto, a child of the member or of the spouse, of any age, a person who is financially dependent on the member, or a person who has an interdependent relationship with the member.
The rules are relatively restrictive, so the benefits could not be paid to a business partner or a friend of the family, for instance, unless they met one of the other criteria described above.
What happens if one member of an SMSF dies?
There are various options as to what happens to the fund when one member dies but another member or members is still alive.
“The fund can continue to exist, but the trustee structure of the fund will likely need to change. If a corporate trustee administers the fund, it’s possible that the fund may be able to continue as it had before the member died because it can operate with a trustee company that has a single director. But that director must be the fund member,” says Palermo.
If an individual trustee runs the fund, it can operate as a single member fund. But another trustee will need to be appointed. “In some instances we've dealt with, members have made one of their children a trustee, but have not made them a member,” he explains.
Wills and beneficiaries
When it comes to dealing with your fund in your will, it’s important to remember superannuation doesn't automatically form part of your estate.
“You can make your estate the beneficiary of your SMSF, which will allow you to divide your assets as you see fit,” says Palermo.
In terms of structuring your assets to leave your beneficiaries in the best position possible, that really depends on the fund member's individual circumstances.
“We generally suggest making binding death nominations to ensure that the trustee follows your wishes. The death nomination binds the trustees to pay a death benefit to a nominated beneficiary and the trustee cannot generally exercise its discretion. It does have to be a valid nomination, however,” he adds.
So if the nomination is not sufficiently clear, then it’s up to the trustee to follow certain provisions to ensure the funds are appropriately apportioned. Generally, this requires two adults, who are not beneficiaries, to witness the trustee’s actions. Often this involves the member’s accountant.
“They're generally not beneficiaries. But we do a lot of work with our clients to ensure they do have a valid death benefit nomination. If they're in our office, we can witness the nomination documents while the trustees are signing them,” he says.
Above all, Palermo says it's important SMSF members are aware of the rules because in the event of a death, the benefits need to be dealt with as soon as possible.
“When a fund member dies, often their SMSF is not the first priority for their loved ones. But it is important to advise the professionals looking after the fund of the death as soon as possible, to ensure it is dealt with appropriately,” says Palermo.
The provisions that apply to an SMSF when a member dies are complex and strict. It’s important SMSF members ensure they make binding death nominations when the fund is set up so that when a member dies, there’s no confusion about this important asset at a time when family and others close to the member have many other considerations to deal with.