Managing an SMSF in the event of a member’s death
Losing a loved one is never easy. The last thing on most people’s minds when this happens is what to do about the person’s superannuation. During this period of grief, it can be reassuring to know you or your loved one have made plans to make the process of dealing with their superannuation benefits as clear and easy to manage as possible.
Superannuation must be ‘cashed’ as soon as practicable after the death of a member. The Australian Taxation Office (ATO) generally expects payment to be made within six months of death, unless there is a valid reason beyond the control of the trustee for the delay, such as identifying eligible beneficiaries or seeking legal advice.
Many Australians will die without a will, leaving their family members to deal with their assets and liabilities without guidance.
With some planning and forethought, you can help your family and loved ones deal with your passing. The first step is to create a valid will and consider how you will deal with your estate and superannuation balance.
Superannuation does not automatically form part of your estate. You should consider whether you want to deal with superannuation separately from your will and have it paid directly to your eligible beneficiaries, or combine it with your estate for your legal personal representative (LPR) to deal with under the wishes of your will.
In addition, there are a number of options available to you when considering how you wish your superannuation benefits to be dealt with upon your death:
- From leaving complete discretion to the trustee of your self-managed superannuation fund (SMSF) as to how and to whom your superannuation is paid; and
- To providing binding instructions that, if executed correctly, will withstand a challenge from any potentially disappointed beneficiaries or vexatious litigants.
The type of death benefit nomination or instructions you choose to provide to the trustee of your SMSF will depend on your personal circumstances. We recommend you work closely with your superannuation adviser and your solicitor to ensure that all of your circumstances are considered holistically.
Who can receive my superannuation?
Subject to your superannuation fund’s trust deed and governing rules, a superannuation death benefit can generally be paid to:
- Member dependants – spouse, children or financially dependent individuals; or
- Member’s legal personal representative to form part of their estate.
Where the death benefit is paid to the LPR and dealt with under the terms of a will, there is no restriction on who can receive the death benefit.
However, there are tax implications with respect to the death benefit.
Do my beneficiaries have to pay tax?
The cashing of a death benefit may be in the form of a lump sum payment (up to two payments i.e. interim and final payment) or an income stream. In reference to the earlier taxation definition of dependant, the table above outlines the taxation of the death benefit.
Death benefit and transfer balance cap
With the introduction of the transfer balance cap (TBC) from 1 July 2017, careful consideration of the cap for potential beneficiaries is also important.
Each individual has a lifetime TBC of $1.6 million, which is subject to indexation. The cap is triggered when an individual first commences a retirement phase pension within their superannuation fund. Their TBC will increase or decrease upon further commencement of retirement phase pensions or commutation of retirement phase pensions. A member’s TBC is lost upon their death and is not transferred to a dependant.
Where a member dies and their superannuation benefits are paid as a lump sum, there is no effect to their beneficiary’s TBC. However, where the superannuation benefits are paid as an income stream for the benefit of a beneficiary, the beneficiary’s TBC will have an increasing credit.
It is important to consider if a dependant beneficiary who will receive the death benefit income stream has an existing retirement phase pension and their own TBC. Where excess amounts of the TBC are transferred to retirement phase pensions, the beneficiary will be required to take steps to reduce the excess, and may receive a financial penalty from the ATO.
It is important to plan for your future so you and your family have peace of mind when the inevitable occurs. As with all financial matters, estate planning requires a holistic approach to ensure your wishes are documented and executed appropriately. Always obtain specialist advice from a superannuation specialist and your solicitor, and ensure it is reviewed periodically.
Helen Chhor, associate director, business services, BDO