I’ve had the unfortunate news this week of a client passing away from a terminal illness. Fortunately we have prepared and developed over a period of time appropriate strategies and mechanisms to ensure the wishes of the member will be dealt exactly how he wants them to, providing a tax-free income streams for his wife, which will also benefit his children (by his wife paying out a tax-free lump sum). Refer to the Golden Keys to SMSF Success blog further details of some of the strategies.
It leads me to what is required from a superannuation point of view when a member of an SMSF passes away? Firstly, you need to remember that they are not only a member, but also a trustee or director of a corporate trustee. As a result, you need to consider the issues that relate to both the individual as a fund member but also in their capacity as trustee.
Fund Trustee/Director of Corporate Trustee
Subject to the fund’s governing rules, it may (but should) be a requirement that the deceased member’s Legal Personal Representative (“LPR”) (Executor) become a fund trustee or director until such a time as the benefit has been paid to the respective beneficiary/ies. This may be in the form of an income stream, lump sum or combination of both (subject to who is a dependent).
The trust deed is critical here, as it stipulates ultimately who is responsible for dealing with the death benefit payment. I used the words “should be” (above) about appointing the LPR as a replacement trustee because it is important that the deceased member’s representative has a say regarding the distribution of these benefits. Unless appointed to a trustee role, the LPR will have no power over the superannuation assets of the deceased member unless they are passed through to the estate to be dealt with under the provisions of the deceased member’s Will.
Important Note – a common misconception is that people think that their Will covers their superannuation; it does not!!
As Fund Trustee, the following items need to be addressed and/or occur:
- Appoint LPR as replacement trustee for deceased member. This would require notification to ASIC regarding the appointment of a new director (along with advising of the death of a director).
- Advise ATO of change of details regarding deceased trustee/member
- Advise ATO of change of details regarding appointment of LPR as trustee/director (where applicable)
- Upon notification from the survivor(s) of the deceased member, you need to review any existing death benefit nomination that is in place (assuming one exists). The payment of the benefit needs to have regard to any instructions placed within the nomination, any legal requirements (i.e. is it valid? is it binding/non-binding?) and any beneficiaries of the deceased member that are dependants.
- Need to arrange for the payment of the deceased member’s superannuation interest(s) to the beneficiary/ies in the form of a lump sum, pension of combination of both. The death benefit instruction should provide details regarding the payment, including for example where a lump sum payment is to be made as an in-specie transfer (e.g. property) to a beneficiary or to the estate.
- Where an anti-detriment reserve has been operating with the fund, the trustees will also need to give consideration regarding the payment of this additional amount from Fund Reserves in addition to the member’s superannuation interest(s).
- Once the benefits have been paid to the respective beneficiary/ies, the LPR will be required to resign as a trustee/director of the fund, including reporting these changes to the ATO & ASIC.
At the member level, the following would need to occur regarding the deceased member:
- Advice to the trustees of the passing of the fund member, including providing information regarding any existence of a valid death benefit nomination and dependants.
- Instructions by a beneficiary regarding the payment of any superannuation interests in the form of pension, lump sum or combination of the two. Any binding death benefit nomination or SMSF Will (death benefit rule), may have prescriptive instructions for the payment of the benefits. For example that a dependant child is to receive a non-commutable income stream of $15,000 per annum, indexed at 3% each year until age 25, where a lump sum is to be paid to the estate to then be dealt with in accordance with the provisions of the Will.
Dealing with the events of someone passing away is always a difficult process. However, it is important that the procedure for the payment of the benefits is dealt with appropriately and within a reasonable time, as the loved ones are still trustees and members of the fund and are most likely still grieving over the loss of a family member.