SMSF Death Benefits – Surviving the Death of a Member
SMSFs give members additional control over their estate plans compared to typical industry, retail or employer funds. This is achieved in various and several ways.
These control options should, however, be based on the rules of the particular SMSF. These are usually set out in clauses of the trust deed and other related documents (which are also called governing rules of the SMSF). These rules also determine how the trustee structure is going to be reconstructed on the event of a member’s death. They also determine how SMSF death benefits are to be handled and paid to the beneficiaries.
This justifies why the trust deed and other relevant documents are critical in the estate planning process and in determining what rules apply to the fund’s members.
There are various ways that let SMSF governing rules help deal with the provisions of SMSF death benefits to dependents or beneficiaries. The provision of SMSF death benefits may, however, depend on who is controlling the super fund after the member’s death and on the provisions placed in accordance with the rules of the trust deed on who will be paid for the death benefit and the wishes of the deceased. These may or may not be carried out by the member controlling the SMSF depending on the trust deed.
The living members can make decisions regarding SMSF death benefits based on the trust deed. An SMSF auditor will typically check if the trust deed established the fund for the provision of the dependents. If an SMSF trust deed has a clause that gives total discretion to the surviving SMSF trustees in evaluating potential eligible dependents of the deceased member and choose to whom and how much of the death benefit will be paid, the final decision lies in the hands of the remaining living members.
However, these clauses can be appealed in circumstances where there are wishes of the deceased member, to provide maximum flexibility in determining who should be paid at the time of death. The clause could apply where a binding nomination for death benefit has failed by default or for some reason. Here, the trustees can decide who is to be paid and by how much. A nomination for a binding death benefit may fail because a person nominated was a dependent at the time the nomination was created but was not dependent at the time of death. An example is when a former spouse have been nominated and no alternative was provided.
When an executor acts as a trustee
The deceased member’s executor can and usually come in to act as a trustee in their place until a time when all SMSF death benefits are paid or start to be paid. When there is more than one executor, they can act in place of the deceased member or trustee.
When the executor is appointed, he or she takes full responsibility as a trustee and is subject to the same liabilities and obligations as the other trustees. Their appointment should be accepted and confirmed in writing. The Australian Taxation Office or ATO trustee declaration should be signed and retained along with the fund’s records. The fund is obliged to maintain records of changes to directors of a corporate trustee and individual trustees for 10 years.
Risks and tensions occur when Wills and estate distribution is managed poorly by executors or court-appointed administrators. These can potentially arise with an SMSF. This happens when members have the discretion to decide how and to whom a death benefit will be paid. If there is no requirement in the trust deed to permit a binding death benefit or pension nomination, or none was made or was made wrongly, most trust deeds give the living trustees the authority or power to determine which eligible dependents of the deceased should be given the benefits and how.
Governing rules of the SMSF should deal with trustee succession and should clearly set out the parameters of the trustees’ duties and powers. This helps greatly in the payment of SMSF death benefits and the smooth operation of the fund.
Executors of the deceased estate may act in place of the deceased but it is not compulsory. Their appointment is only for a specific time, from the date of death until the payment of SMSF death benefits. Once death benefits have been paid, executors must resign as trustees. The fund has six months from this time to rectify its trustee structure if needed. It should satisfy the definition of a Self-Manage Super Fund or SMSF according to super laws.
There are alternative structures aside from having an executor working as a trustee until the SMSF death benefits are paid off. These alternatives include:
- When an eligible person is appointed to act as a second individual trustee in case the fund becomes a single-member SMSF. The person does not need to become a member of the trustee, but should satisfy the eligibility criteria needed to be appointed as trustee. They should accept the job in writing and within 21 days should execute a trustee declaration. The trustee does not need to resign once the death benefit has been paid. There is also no need to amend the trustee structure.
- If the SMSF has a corporate trustee, the surviving member can continue alone as the sole director of the corporate trustee. He or she can continue to satisfy the definition of an SMSF. However, the Australian Securities and Investments Commission or ASIC should be informed about the removal from the directorship of the deceased member.
- A second director can be appointed but does not need to become a member of the SMSF. They simply need to satisfy the requirements to be appointed as director. They have to accept their appointment in writing, ASIC should be informed of their appointment and execute the trustee declaration. There is no need to amend the trustee structure.
- However, if the surviving member does not wish to continue with the SMSF, there is not any need to appoint a second individual trustee or director of the corporate trustee.
- If trustees pay out the necessary death benefit, rolled them over to their entitlements to another super arrangement and wind up the SMSF within six months of the death of a member, it satisfies the definition of an SMSF. No appointments would be necessary.
It is recommended to seek advice from and SMSF specialist to help in implementing the appropriate trustee structure for your needs and how to deal with the provision of SMSF death benefits. An SMSF approved auditor that offers compliance audit services will help make sure that your structure adheres to the legislations and rules of Self-Managed Super Funds.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.