SMSFs and estate planning: Key issues that SMSF trustees need to know

One of the fundamental requirements for SMSFs is that all members of the fund must also act as either an individual trustee of the fund or as a director of the corporate trustee. This rule is in place to protect all members’ interests in the fund and so each member has a say in the ongoing management of their retirement savings.

When a member passes away, someone needs to step in and act in place of the deceased member until such time as their member benefits are paid from the fund. This replacement process must be carried out within a six-month period to ensure that the SMSF meets its compliance obligations.

The legislation allows the legal personal representative (LPR) of the deceased member to act as a trustee of the fund or a director of a corporate trustee from the time of death until payments of the deceased member’s death benefits from the fund begin. 

This can be a complex process, but it is important to ensure the smooth administration and compliance of the fund.

Initially, trustees need to review both the SMSF trust deed and the constitution of the corporate trustee, where relevant, for any processes they may be required to follow.

Keep in mind that even though the superannuation legislation allows the deceased member’s LPR to step in and act, the member may have put in place documentation that nominates a specific person to fulfill this role, often referred to as a replacement trustee or a replacement director. Any such nomination, where valid, must be followed.

Ongoing capacity or willingness to continue

Once the trustee replacement process has been addressed, it would be a good time to assess the ongoing viability of the SMSF.

In many cases, the death of one member can lead to the remaining member(s) considering winding up the SMSF. This is most relevant where the deceased member was more actively involved in the fund’s ongoing management than other members.

The remaining trustees should consider if they have the time and skills or even the desire to continue running the fund. If not, it may be best to start the wind-up process and move retirement savings out of the SMSF and into another complying fund or out of super entirely where relevant.

Review and act on death benefit nominations

Next, the fund’s trustees should check for any death benefit nominations that may have been put in place by the deceased member and check that the nomination is valid.

If the deceased member was receiving an income stream from the fund, it’s also important to check for any reversionary pension nomination for those income streams.

When dealing with death benefit nominations and paying death benefits, SMSF trustees should consider the following:

• Where a death benefit nomination is in place, is it in line with the trust deed requirements? Is it valid?
• Does the trust deed also allow the death benefit to be paid in the way the member’s nomination intended? For example, as a pension, lump sums or in-specie transfer of assets.
• If not, the death benefit nomination may be invalid and the trustees may need to pay the death benefit another way.
• Trustees should consider the liquidity of the SMSF prior to making a death benefit payment. Is there sufficient cash to pay the required amount out from the fund?
• Will there be sufficient cashflow and liquidity after the death benefit has been paid for the SMSF to meet its ongoing expenses, including any pension requirements?
• Where an existing pension was established as a reversionary pension, the trustees need to make sure that the pension continues to be paid to the nominated beneficiary the same way it was paid to the deceased member. At the following 1 July, the minimum pension requirements need to be recalculated using the age of the reversionary beneficiary.
• The transfer balance account reporting (TBAR) obligations must be addressed where a death benefit is paid to a beneficiary as a new pension or as a reversionary beneficiary for existing and relevant pensions. Lump sum death benefits paid out from an SMSF would not usually need to be reported using the TBAR system.

Death benefit payment time frames

The legislation and regulatory requirements are that a superannuation death benefit needs to be paid from a super fund “as soon as is practicable”.

Although there is no specific definition for this, the ATO would usually expect this to have been seen to within six months from the date of death.

In some cases, this timeframe may not be achievable due to estate disputes, locating beneficiaries or other fund specific issues. If this is relevant to you, make sure you keep clear records of what has been done and the issues being faced.  

Other death benefit processes and requirements

There are a number of other requirements SMSF trustees need to address. The following are some of the more important and relevant issues to consider.

Update and inform relevant parties

Consider who should be informed of the member’s death, including the fund’s accountant and advisers. They may be able to help with the necessary processes or may be aware of any member specific issues that need to be addressed.

Once any restructuring has occurred, contact the Australian Taxation Office (ATO) and inform them of any relevant changes to trustees or directors.

If you have decided to move from individual trustees to a corporate trustee, then you must also advise the ATO of these changes.

Update the fund’s trust deed where required

The remaining trustees need to ensure that the fund’s trust deed remains current where any changes have been made to the fund.

Make sure the SMSF investment strategy remains valid

The trustee(s) need to review and update the fund’s investment strategy to ensure it remains relevant for the continuing members.

A change in the fund’s membership may result in changes to its strategy.

For example, where a pension member passes away, the cash flow and liquidity requirements of the SMSF would change. Or where a death benefit is being paid as a death benefit pension, there may be the need for more cash or liquidity to be maintained.

Documentation review and update

Any changes to the fund must be reflected in its documentation.

Where the SMSF has individual trustees, any change to those trustees should be reflected in the fund’s paperwork and the ownership of assets. For this reason, many SMSFs with individual trustees choose this time to restructure to a corporate trustee.

The next article in this series will look at estate planning issues relevant at the SMSF (fund) level.

The information contained in this article is general in nature.