By Monica Rule

One topic that I am often asked to write about is what happens on the death of a Self Managed Superannuation Fund (SMSF) member?    SMSF trustees and professionals are often confused as to what they need to do in the event of an SMSF member’s death.   I have listed below things that you need to consider:

1. Was the deceased member in receipt of a pension from their SMSF?   If the deceased member was in receipt of a pension from their SMSF prior to death, then you will need to enquire whether the pension was a reversionary pension or a non-reversionary pension.  If it is a reversionary pension, then the pension will continue to be paid to the nominated reversionary pensioner. 

   The nominated reversionary pensioner can only be a dependant of the deceased member; such as - a spouse, a child under the age of 18, a child aged 18 to 24 who was financially dependent on the deceased prior to their death or a child with a disability.  A reversionary pensioner cannot be an adult child or the legal personal representative of the deceased.

   If the deceased member was in receipt of a non-reversionary pension or was not in receipt of any pension, then a death benefit needs to be paid out as soon as practicable by way of a cash payment (i.e. either commencing a new pension or a lump sum death benefit) or an in-specie lump sum benefit.  If assets need to be sold to pay a lump sum cash death benefit then that is what must be done.  The death benefit payment cannot be made by a journal entry. 

2. Did the deceased have a binding death benefit nomination (BDBN)? A BDBN is a direction from the SMSF member to the SMSF trustee to pay the member’s superannuation to a nominated beneficiary or beneficiaries.  An SMSF member can nominate as many beneficiaries as they like, however, they can only nominate their dependants and/or legal personal representative.  Dependants include their spouse/de facto (same sex or a different sex), their child of any age, a person who was in an interdependency relationship with the member, and a person financially dependent on the member.

   If the deceased had a BDBN, trustees should ensure that the nomination was put in place as per the requirements of the SMSF’s trust deed.  There have been many disputes played out in our Courts that clearly show the errors made by SMSF trustees in relation to payment of death benefits.  These cases have outlined the importance of:

   • ensuring that a trustworthy person is chosen to act as the co-trustee
   • having a binding nomination instead of a non-binding nomination   
   • ensuring that the nomination has not lapsed
   • using the correct terms/wording when nominating someone to act as the legal personal representative.

   As a guide, Trustees should also ensure that the person nominated in the BDBN is not a different person nominated for the reversionary pension.

   If the deceased member does not have a BDBN, then the remaining trustee of the SMSF has the discretion as to how the deceased’s superannuation will be paid out.  The remaining trustee does not have to comply with the deceased’s wishes expressed in their Will as the Will is ineffective.

   If the deceased member wants their superannuation to be distributed in accordance with their Will, then they would need to put in place a BDBN in favour of their legal personal representative, who is their executor or administrator of their estate, to receive the death benefit.  The death benefit will then form part of the deceased’s estate and be distributed in accordance with their Will (if they have one) or in accordance with the laws that govern people who die intestate.

   If your SMSF is a single member fund with individual trustees, you need to be confident that the co-trustee of your SMSF is someone trustworthy and will follow your wishes or comply with your BDBN.   If your SMSF is a single member fund with a corporate trustee, then you need to ensure that your SMSF trust deed and the company’s constitution allow for automatic director appointment. You may wish to appoint a legal personal representative, or the executor of your estate, to have the power to appoint a new director of the company.  If your trust deed or the company’s constitution does not allow for a provision such as this, then an executor of your estate is ordinarily appointed by means of a valid Will.  If there is no Will, then a near relative or other person would have to apply to the Supreme Court for letters of administration to manage the estate.

3. Tax Exemption:  If the deceased member was in receipt of a pension, the tax exemption available on investment income from assets that were supporting the pension will continue to be exempt until the death benefit is paid out of the SMSF. Any capital gains derived from the sale of pension assets will also retain their tax exempt status.  However, the tax exemption will not apply to any amounts allocated to the pension account after the member’s death, such as an anti-detriment payment or life insurance proceeds.

4. Minimum pension payment:  On the death of a pensioner there is no requirement to pay the minimum amount of the pension if the pension is a non-reversionary pension and is commuted in the year of the member’s death and is paid out as a lump sum death benefit or a new pension commences. On the other hand, if the pension reverts to another member then a minimum pension payment is required.

5. Winding up:   If the fund is a single member SMSF and is no longer required to operate, then the SMSF needs to be wound up by paying out the death benefit, paying all its expenses and tax liabilities, lodging the final income tax return and notifying the Australian Taxation Office of the wind up date and closing the SMSF’s bank account.

Gold and Platinum Members please read on for details of five (5) important Court cases that have set legal precedents for death benefit disputes.

Monica Rule is an SMSF Specialist and author – www.monicarule.com.au

“Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin. ”

Related documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Investment Strategy for Self Managed Super 15/16
• Pension Pack for Self Managed Super