Ask Colley about the loss of a loved one and your SMSF
In this edition, Graeme Colley answers “what happens if the deceased has an SMSF – can it continue and what needs to be done?”
Q: The death of a family member or close friend is a difficult time for everyone. Gatherings of family or friends help the grieving process and then there’s the will, probate and often, superannuation to deal with. But what happens if the deceased has an SMSF – can it continue and what needs to be done?
A: The most important thing when it comes to the SMSF, like all superannuation, is to pay any death benefits to beneficiaries such as the surviving spouse, children, other dependants or the estate of the deceased. The first thing to look for is any death benefit nomination which expresses the wishes of the deceased. If the nomination is not valid or those nominated have also passed away, the trust deed comes in handy to find out how the death benefit is to be paid. But there are other things to do such as thinking about winding up the SMSF or continuing it if members remain or a pension is payable to a surviving spouse. So, what’s next on the agenda?
Most SMSFs have two members, but many funds have just one member. The death of a member can lead to a number of consequences. If the surviving member has decided to continue with a pension originally payable to the deceased or commence a death benefit pension, the SMSF can keep going. This not only means that the amount to be paid as a pension needs to be calculated but other aspects of the SMSF such as what happens to investments, administration and the fund trustee must also be considered
Luckily the superannuation rules allow an SMSF up to 6 months to get back on track if it can’t meet the definition of an SMSF. When it comes to trustees, an SMSF has a choice of individual trustees or a company trustee. The general rule is that all fund members must be individual trustees or directors of the trustee company. But there are exceptions.
For individual trustees, there must be at least two individuals as trustees for legal reasons. If there is just one member of the SMSF there will need to be a second trustee. However, there is no need for the second individual trustee to be a fund member but, if that person is an employee of the member, the rules limit the second trustee only to relatives. Where a company trustee is involved the fund member must be a director and if there is just one member it is possible, but not essential, to have a second director who is not a fund member.
Let’s have a look at a case to illustrate what happens if a fund trustee was to die. Sally and Ryan are individual members of an SMSF. Ryan dies in a car accident leaving Sally as the only member of the fund and in receipt of a death benefit pension. As far as trusteeship of the fund is concerned, there are probably two practical options. She could continue as an individual trustee and will need a second individual trustee like a close family member who is over 18 to do the job or put in place a corporate trustee with her as the sole director.
As always with SMSFs, it is worthwhile obtaining advice on what’s the most suitable option in the circumstances.