A well-planned and diversified self-managed super fund (SMSF) helps secure your retirement wealth, ensures compliance, and maximises your long-term investment potential.
While these are significant financial objectives, few people consider the possibility that an SMSF member may pass away during its critical growth period. As a trusted team of Gold Coast SMSF accountants, we highly encourage you to take proactive steps so that your superannuation fund runs smoothly despite dire circumstances.
If you’re already an SMSF member or about to start one, understanding critical contingency measures enables you to prevent legal disputes, ensure smooth tax compliance, and prevent delays and inconveniences.
This blog explains what happens when an SMSF member dies, enabling you to achieve these objectives and gain long-term peace of mind.
The Importance of Taking Proactive Measures
An overwhelming 85% of SMSF members are at least 45 years old, per Australian Taxation Office (ATO) statistics. Today, 663,000 SMSF funds, mostly set up by couples, account for a combined $1.06 trillion.
An ageing SMSF base and an average two-person membership per fund means the death of a member could have serious long-term repercussions on the investment. The likelihood of one member passing away is realistic, so SMSF members must take proactive measures to help protect their portfolios and secure their financial future.
Updating the Trustee Structure After a Member’s Death
One of the priorities after an SMS member passes away is ensuring the fund meets its legal trustee responsibilities. Under Australian superannuation law, an SMSF must either have individual trustees who are members of the fund or a corporate trustee where each member is a director.
The death of a member changes the structure, requiring updated trustee arrangements to maintain compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act).
If the SMSF has individual trustees, the deceased member can no longer act as a trustee. In most cases, the deceased’s legal personal representative (LPR), such as the executor named in their will or the administrator of their estate, may become a temporary trustee while the member’s death benefit is administered.
Alternatively, the trustee structure may be amended if the remaining members continue operating the fund according to the legislation and the trust deed.
For SMSFs with a corporate trustee, the deceased member can no longer serve as its director. Depending on the fund’s circumstances and governing legislation, the LPR may be appointed as the director until the completion of the estate’s administration. The relevant authorities and records must also recognise and record this directorial change, respectively.
It’s critical to update the trustee structure when an SMSF member passes away. Delays or incorrect appointments can lead to a non-compliant trustee agreement, increase the risk of regulatory issues, administrative complications, and delays in processing the deceased member’s superannuation benefits.
Managing the Deceased Member’s Death Benefit
The next step is administering the deceased member’s SMSF balance, commonly referred to as the death benefit. The benefit’s distribution depends on the fund’s trust deed, the member’s documented wishes, and the relevant superannuation legislation.
If the deceased SMSF member had a valid binding death benefit nomination (BDBN) in place, the trustees must distribute the benefit following these guidelines. Some cases require paying the benefit directly to the nominated eligible dependents or to the member’s LPR so he can distribute it through the estate.
However, the absence, expiry, or invalidity of a BDBN gives the trustees the discretion to determine the death benefit’s recipients. Their decision must adhere to the fund’s trust deed and superannuation legislation, which limits payments to eligible dependents or the member’s estate.
Since trustees must evaluate each beneficiary’s circumstances, this process may become complicated and lead to family disputes. For this reason, we strongly recommend reviewing and updating death benefit nominations regularly to prevent this scenario and ensure long-term certainty.
Deciding Between a Lump Sum or a Pension
Dependents and spouses of deceased SMSF members can receive a benefit through a lump sum, a pension, or a combination of both. The method of distribution can only be determined by the stipulations of the trust fund and the specific beneficiaries.
For instance, adult sons and daughters who aren’t financially dependent cannot receive an ongoing pension. Instead, they can only receive a lump sum. It’s also important to note that tax implications depend on the recipient’s eligibility and the benefit’s structure.
Deciding between a lump sum or a pension for the purposes of receiving an SMSF benefit can be complicated. For this reason, consulting reputable SMSF accountants can help clear confusion and deliver long-term peace of mind. Incorrect tax components or missed deadlines related to benefit payments can lead to costly legal complications for the deceased SMSF member’s family.
Practical Responsibilities After a Member’s Death
In addition to meeting legal and compliance requirements, the remaining trustees must also complete several administrative duties to ensure smooth SMSF operations, such as updating the fund’s asset valuations, lodging life insurance claims, ensuring the current investment strategy reflects the fund’s new situation, and submitting the annual audit and SMSF annual return on time.
As experienced SMSF specialists on the Gold Coast, we understand that coping with the loss of a loved one and handling these responsibilities can be challenging. Consulting a trusted expert can provide you with practical guidance, leading to long-term compliance and meeting your obligations during a difficult time.
Thoughtful Planning Can Prevent Future Complications
We recommend thoughtful planning after an SMSF member’s death to simplify the fund’s long-term operations. Regularly reviewing your binding death benefit nomination, updating it after major life events, and ensuring your trust deeds align with your long-term preferences can help prevent delays and disputes.
Discussing succession planning with a reputable SMSF tax accountant can help you achieve these objectives and gain long-term peace of mind. At TW Accounting, we encourage your clients to take proactive measures to provide greater certainty for their families and ensure the proper distribution of life savings when the time comes. Book an appointment today if you need assistance and tailored solutions for these SMSF issues.
