Video transcript – What happens when a member dies
We'd all rather not think about it, but you should know what will happen to your self-managed super fund if a member dies.
Bob and Greg are individual trustees of a typical SMSF. But what happens if Bob dies?
A legal personal representative is appointed as trustee for Bob and looks after his interest in the fund until his benefits are paid to his beneficiaries.
Then Greg must make sure the fund still meets the definition of an SMSF.
If the fund had a corporate trustee, it would remain an SMSF because Greg could be the sole director.
But because Greg is an individual trustee, the fund won't meet the definition of an SMSF.
To fix this, Greg could ask someone else to become a trustee, set up a corporate trustee and become its director, or transfer his super to another fund and wind up the SMSF.
Bob's death benefits must be dealt with as soon as possible.
If the fund has limited cash available, assets may need to be sold to pay the benefits.
SMSF members can nominate who will get their benefits when they die.
A binding death benefit nomination directs the trustee to pay the benefit to a legal personal representative or a dependant.
Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the trust deed and super laws.
The trust deed must be followed, even if it is different to the member's will.
To understand how death benefits can be paid you need to know who is a dependant.
A dependant is generally a spouse, or someone in a close personal interdependent relationship. Or a child who is under 18, has a disability or is aged between 18 and 25 and is financially dependent on the deceased.
A dependant can be paid a lump sum or an income stream. A non-dependent can only be paid a lump sum.
Benefits paid as a lump sum to a dependant are tax-free but a lump sum paid to a non-dependant will be taxed.
Lump sums can be paid in cash or non-cash form, for example, shares or property.
The trustee may need to withhold tax from a death benefit. Working this out can be complex and will depend on a number of factors.
If a trustee has to withhold tax, they must register for PAYG withholding and complete some other ATO forms.
It's wise to plan ahead. If there is a dispute over the payment of death benefits which can't be resolved, it may lead to costly court action.
Clear guidelines in the trust deed will help prevent problems. An SMSF professional can help you get it right.
For more SMSF information, take a look at our other videos or at our other videos – or visit the ATO website at ato.gov.au