By Monica Rule

Do you ever wonder what happens to your superannuation after you die? This is particularly important if you have a Self Managed Superannuation Fund (SMSF). No-one wants to burden their loved ones with planning a funeral and figuring out what to do with your SMSF, so let’s get prepared for and take a look at the things you need to consider when an SMSF member dies.

To assist SMSF members to understand the requirements of the superannuation and taxation laws, I have provided answers to common questions asked by my SMSF clients.

Can my superannuation savings remain in my SMSF after my death?

Death is a compulsory payment situation under the superannuation law.   It means, the deceased’s superannuation cannot remain in their accumulation and/or pension account.  It must be paid out of their SMSF either to their dependants or their legal personal representative.

In what form does the deceased’s superannuation need to be paid?

The form of payment will depend on what is allowed by the deceased’s SMSF trust deed.  However, the law allows the deceased’s superannuation to be paid either as a pension and/or a lump sum death benefit.  Under the superannuation law, only the deceased’s dependants such as a spouse, a child under the age of 18, a child up to age 24 who was financially dependent on the deceased prior to their death, and a child of any age with a disability can receive the deceased’s superannuation as a pension. Other dependents such as an adult child and the legal personal representative can only receive the death benefit as a lump sum. 

What happens to the deceased’s retirement pension upon death?

If the deceased’s pension is a reversionary pension, then it can continue to be paid to the nominated beneficiary, such as their spouse. If it is a non-reversionary pension, then the pension will cease upon their death, and can be paid out to the surviving spouse either as a new death benefit pension and/or a lump sum death benefit.  Paying the deceased’s pension to their spouse will satisfy the compulsory payment situation as it is no longer in the deceased’s superannuation account.

Is it only the reversionary pension that can be “reverted” to my spouse? What about Transition to Retirement Income Streams (TRIS)?

A reversionary pension can revert to your spouse and continue to be paid.  However, under the current law, a transition to retirement income stream (TRIS) cannot revert to your spouse unless your spouse has met a condition of release such as having reached the age of 65 or reached their preservation age and retired.  This does not mean, however, that a new death benefit pension cannot commence from the SMSF and be paid to your spouse.  In addition money in the deceased’s accumulation account can be paid as a death benefit pension to the surviving spouse. The surviving spouse needs to ensure that all their pension accounts (i.e. their own retirement pension plus the death benefit pension) do not exceed the current transfer balance cap of $1.6 million.

Is there a time period in which the deceased’s superannuation must be paid?

The deceased’s superannuation must be paid “as soon as practicable”.  The Tax Office will normally allow up to six months for payment. If it takes more than six months, then the SMSF trustee may need to explain the reason for the delay.  The Tax Office may accept reasons such as the death benefit nomination being challenged by beneficiaries, or the uncertainty of eligible beneficiaries.  But if the trustee just took their time to pay out the death benefit without good reason, then the Tax Office may take compliance action against the SMSF.

Can assets be used to pay a death benefit?

A lump sum death benefit can be paid using assets.  However, a pension cannot be paid using assets.  If a pension is either partially or fully commuted, then the commutation amount can be paid as a lump sum death benefit using assets.  The pension recipient needs to ensure that the minimum pension payment requirements are met prior to the commutation.

Under the individual trustee structure, how long does the surviving spouse have before the second trustee needs to be appointed?

Once an SMSF becomes a single member SMSF, it has six months to restructure.  This means, if the surviving spouse wants the SMSF to remain under an individual trustee structure, a second trustee will need to be appointed prior to the expiration of the six-month time period.

Is the remaining trustee able to make decisions for the SMSF prior to the appointment of the second trustee?

The remaining trustee can make decisions for the SMSF during the six-month period, which includes paying the deceased’s superannuation to their dependants or legal personal representative.

Is the deceased’s transfer balance cap transferable to the surviving spouse?

The deceased’s transfer balance cap (currently $1.6 million) is not transferable to their spouse upon their death.  If their spouse is accessing a retirement pension from the SMSF and will also receive the deceased’s pension, then they need to ensure that the total of both pensions does not exceed the transfer balance cap (currently $1.6 million).  They can do this by either reducing their pension by putting money back into their accumulation account or paying out some of their pension as a lump sum superannuation benefit prior to receiving the deceased’s pension.  The spouse cannot put the deceased’s superannuation into their accumulation account.

When does the deceased’s pension count towards the surviving spouse’s transfer balance cap?

If the deceased’s pension is reversionary, then the amount counted towards the spouse’s transfer balance cap is the amount in the deceased’s retirement pension account on the date of death. This is counted towards the spouse’s transfer balance cap twelve months from the date of death.  If the pension is non-reversionary then the amount paid to the spouse will count on the date it is paid.

It is important for SMSF members to take an interest in the superannuation law.  By understanding the law, members can ensure their superannuation is passed onto their loved ones with a minimum of fuss.

For Gold and Platinum members, Monica has provided links to ATO publications that address how to determine whether a person is a “financial dependant” under the income tax and superannuation laws for death benefits.

Monica Rule is the author of The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English 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
• SMSF - Update Rules
• Pension Pack for Self Managed Super

Related webinars:

• Webinar Recording - Investment Restrictions For Self Managed Superannuation Funds
• Webinar Recording - Time To Address The SMSF Sleeper - Estate Planning Within The Fund
• Webinar Recording - SMSF End Of Year Essentials