SMSF Death Benefits: Key Insights for Secure Planning

Managing a Self-Managed Super Fund involves investment strategies and planning for SMSF death benefits. Handling benefits is crucial to ensure they are allocated to the correct beneficiaries and comply with legal requirements. This article outlines the key considerations and audit processes for SMSF death benefits, guiding you through every step.

Managing Trusteeship After Death in SMSF Death Benefits

The first step in managing SMSF death benefits is to review the SMSF’s trust deed. The trust deed will specify who becomes the successor trustee upon a member’s death. Understanding the process is essential for proper management of these benefits. Additionally, it’s important to verify if the deed allows appointing a Legal Personal Representative (LPR) to act on behalf of the deceased member, which is a key step in ensuring correct management.

Acceptance of LPR
To manage SMSF death benefits effectively, the LPR must formally accept their role as trustee. This formal acceptance ensures they are legally recognised and authorised to handle the SMSF.

Trustee Declaration 
The LPR must sign a Trustee Declaration within 21 days of their appointment. According to the trust deed and regulations, this declaration is crucial for managing SMSF death benefits.

Corporate Trustee Review 
Reviewing the company’s constitution is vital if a corporate trustee manages the SMSF. Understanding the process for appointing the LPR as a director is also essential to managing SMSF death benefits properly.

Regulatory Reporting 
Notify ASIC and the ATO of the new trustee or director’s appointment. This step ensures that the SMSF is compliant with regulatory requirements.

Note: When a member dies, the fund must meet Section 17A of the SIS Act. Section 17A(3)(a) of the SIS Act provides an exception whereby a fund remains a self-managed superannuation fund (SMSF) even if a member dies, provided that the legal personal representative (LPR) acts as a trustee or director of the corporate trustee. This period starts when the member dies and ends when death benefits begin to be payable. Additionally, Section 17A (4) of the SIS Act grants the SMSF 6 months after it would otherwise fail to meet the definition of an SMSF.

Key Steps in the Payment

Eligibility of Beneficiaries 
Upon a member’s death, the SMSF typically distributes a death benefit to a dependent or another beneficiary. Understanding who qualifies for these benefits is crucial, as it impacts the fund’s responsibilities and the deceased member’s wishes.

Definition of Dependents 
It’s essential to know the differences in how dependents are defined under the SIS Act 1993 and tax law (Income Tax Assessment Act 1997). Classifying a recipient as a dependent under these laws affects how benefits are treated.

Are There Any Nominations?
Death benefit nominations are formal instructions on how SMSF death benefits should be distributed. Understanding the different types of nominations—binding, non-binding, and reversionary pensions—is crucial in managing these benefits effectively. If there is no nomination or it is invalid, the trustee must exercise discretion to determine the death benefit recipient as per the trust deed.

A common challenge is deciding how to allocate superannuation to a specific beneficiary, whether through a reversionary pension, a binding death benefit nomination, or special clauses in the trust deed. The problem arises when these documents conflict: which one takes precedence? Ideally, all documents should align to avoid confusion. However, when discrepancies occur, the resolution depends on the specific provisions outlined in the SMSF’s trust deed. (IOPPOLO -v- CONTI [2015] WASCA 45)

Paying: Methods and Time Frames
SMSF death benefits can be distributed in three primary ways: as a lump sum, a death benefit pension, or a reversionary pension. Superannuation law requires that SMSF death benefits be managed “as soon as practicable” after a member’s death. The ATO expects SMSFs to handle these benefits within six months. If there are delays, trustees should document the reasons, the expected resolution time, and why they believe they are still complying with the “as soon as practicable” rule.

Note: Superannuation law allows for a maximum of two lump sum payments when part or all of the deceased’s superannuation is distributed. These payments include an interim amount, which must not exceed the benefit’s value at the time of the member’s death, and a final payment. (r6.21 of the SISR, ATO ID 2015/23)

Conclusion

Trustees should seek formal advice if there are any uncertainties about their actions rather than proceeding without proper guidance. Relying on the auditor’s feedback after the fact can be risky; by then, the death benefits might have already been distributed, leading to potentially complex and costly rectifications.

By being aware of the above information, trustees can ensure that SMSF death benefits are distributed correctly and in compliance with the law. Proper management not only honours the wishes of the deceased member but also safeguards the interests of the beneficiaries. For expert guidance and audit services, National Audits Group is here to support you through every step of this complex process.

Further Reading: For more on SMSF management, explore our article on SMSF Collectables and Personal Use Assets.

Ralph Tolentino, Auditor, National Audits Group

References:

• ATO – Death of a member https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-benefits/death-of-a-member
• ATO – Paying superannuation death benefits https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/paying-superannuation-death-benefits
• SMSF Adviser – SMSF death benefits issues https://www.smsfadviser.com/news/17895-common-practical-issues-flagged-with-smsf-death-benefits
• Heffron – Death of an SMSF member https://www.heffron.com.au/news/death-of-an-smsf-member