What to do when a Self-Managed Superannuation Fund (SMSF) member dies 📄❤️
If a member of a self-managed superannuation fund (SMSF) passes away, it’s natural to think you need to act quickly. However, while there are important decisions to make, you usually have plenty of time to get everything right without rushing.
When a member dies, there are three main tasks to handle:
- Decide who will receive their super.
- Decide how the super will be paid.
- Make changes to the trustee.
Deciding Who Gets the Super
The first two tasks are often decided together because they are connected. Sometimes, the deceased person has left a document that clearly states who should receive their super and how it should be paid. This document is called a “binding death benefit nomination” because it provides instructions that the trustee must follow.
In other cases, the deceased might have been receiving a pension that was set up to automatically continue to someone else, like a spouse, when they die. This is known as a “reversionary pension.”
If there are clear instructions or a reversionary pension, the trustee doesn’t need to make many decisions. But if there are no instructions, the trustee has to decide what to do.
Understanding the Role of the Will
It’s important to know that the person’s will does not control their super in an SMSF. An SMSF is separate from personal assets, so the will only matters if the super is paid to the estate. If that happens, the super becomes part of the estate and is distributed according to the will.
Making the Right Decisions
Choosing who gets the super and how it’s paid is crucial. It can affect whether the benefit is paid as a pension or a lump sum, how much tax is paid, and whether the trustee faces any legal issues for ignoring valid claims.
Paying the benefit directly to a beneficiary instead of to the estate can have significant consequences. This is why it’s important to take your time and get advice.
Timing and Legal Requirements
You might worry about breaking the law if things aren’t done immediately, but that’s not the case. The main rule is that death benefits must be paid “as soon as practicable.” The Australian Taxation Office (ATO) suggests that six months is usually a reasonable time frame, but it understands that it can take longer in complicated situations or disputes.
For example, if someone dies while receiving a pension that continues to their spouse, there are rules in place to give the spouse time to manage their finances. The inherited pension doesn’t count against the $1.6 million pension limit (transfer balance cap) until 12 months after death.
Immediate Actions
Often, the only urgent task when someone receiving a pension dies is to check if the pension continues to someone else. If not, any regular payments should be stopped immediately.
Changing the Trustee
The final task is updating the trustee. Normally, an SMSF must have all members as trustees or directors of a trustee company. If one member dies, the surviving member continues as the sole trustee. Usually, an SMSF can’t have just one individual trustee, so action is needed. However, there is a six-month grace period to fix the trustee setup without any consequences.
In some cases, the SMSF may be wound up after a member dies. If this happens within the six-month period, there’s no need to fix the trustee.
Take Your Time
While there is a lot to do when a member of an SMSF dies and important decisions to make, you generally have enough time to get everything right. It’s important to avoid rushing and to seek advice when needed.
Parts of this article was first published by Meg Heffron of Heffron Consulting.
