What Happens to an SMSF When A Member Dies?

Self-managed super funds (SMSFs) are becoming an increasingly popular way to save for retirement in Australia. However, it’s important to consider what happens to an SMSF when a member dies.

Benefits: SMSF When A Member Dies

smsf benefits when a member dies

If a member of an SMSF passes away, their legal personal representative will be appointed as trustee for their interests in the fund until their benefits are paid to their beneficiaries. The remaining trustee(s) must ensure that the fund still meets the definition of an SMSF.

If the SMSF has a corporate trustee, the fund can continue as an SMSF because the remaining trustee(s) can appoint themselves as the sole director. However, if the SMSF has individual trustees, it will no longer meet the definition of an SMSF, and the remaining trustee(s) must take steps to rectify this.

One option for the remaining trustee(s) is to ask someone else to become a trustee, set up a corporate trustee, and become its director. Alternatively, they can transfer their super to another fund and wind up the SMSF.

It’s crucial that the deceased member’s benefits are dealt with as soon as possible. If the fund has limited cash available, assets may need to be sold to pay the benefits.

Nominating Beneficiaries in an SMSF: Binding and Non-Binding Nominations

SMSF members can nominate who will receive their benefits when they die. If the nomination is binding, the trustee must pay the benefit to a legal personal representative or a dependent. Without a binding nomination, the remaining trustee(s) will decide how the benefits are distributed, based on the trust deed and super laws. It’s important to note that the trust deed must be followed, even if it differs from the member’s will.

To avoid any confusion or disputes, SMSF members should ensure that their binding death benefit nomination is up to date and reflects their current wishes. It’s essential to review and update the nomination regularly, especially if there are any changes to personal circumstances or family relationships. By doing so, SMSF members can ensure that their super benefits are distributed according to their wishes and prevent any unnecessary stress and conflict for their loved ones during an already difficult time.

Dependents in an SMSF: Eligibility and Payment Options

is the dependent eligible

To determine how death benefits can be paid, it’s necessary to understand who qualifies as a dependant. Here are the qualifications:

  • a dependent is a spouse
  • someone in a close personal interdependent relationship
  • a child who is under 18, or has a disability, or is aged between 18 and 25 
  • financially dependent on the deceased

A dependent can be paid a lump sum or an income stream. In contrast, a non-dependent can only be paid a lump sum. Lump sums paid to dependants are tax-free, while those paid to non-dependants will be taxed.

It’s also essential to note that the trustee may need to withhold tax from a death benefit, and working this out can be complex and dependent on a range of factors. If tax must be withheld, the trustee must register for PAYG withholding and complete other forms with the Australian Taxation Office.

It’s wise to plan ahead to prevent costly court action if there’s a dispute over the payment of death benefits that can’t be resolved. Clear guidelines in the trust deed can help prevent problems, and an SMSF professional can provide valuable advice to ensure that everything is done correctly.

Bottomline

SMSFs are an attractive option for those who want more control over their super and how it’s invested. However, it’s crucial to consider what happens to an SMSF when a member dies. It’s essential to have a plan in place and keep it up to date. An SMSF professional can provide guidance and advice to ensure that everything is handled correctly, and the deceased member’s wishes are respected. 

If you have any questions about SMSFs, contact BloomWealth Accountants, and we’ll be happy to assist you.

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