Written by Ord Minnett SMSF Specialist advisor, Nataliya Sard.
The trustee of an SMSF is required to ‘cash’ your remaining superannuation entitlements (i.e. death benefits) as soon as practicable after the date of death. This is a compulsory cashing requirement and although the term ‘as soon as practicable’ is not defined, the ATO generally expects payment to be within six months of death unless the trustee can demonstrate valid reasons for the delay.
First and foremost it is important to understand that the payment of your superannuation death benefits are covered by the rules of your SMSF trust deed and do not automatically form part of your Estate for distribution in accordance with the terms of your Will.
Who gets to decide on how and to whom to distribute your SMSF benefits?
Critical to ensuring your wishes are implemented on your death is the ‘control’ of the SMSF. The law does not dictate how control of an SMSF is passed on but reference to the SMSF documentation provides the appropriate guidance.
The control of SMSFs comes down to the process involved with replacing trustees and the trustee structure of the SMSF. The process for appointing a new trustee/director will depend on whether your SMSF has individual or corporate trustees:
Individual trustee - you will cease automatically to be a trustee and control will rest with the remaining individual trustees. Adding or removing a new member/trustee gives rise to extra costs and paperwork as any remaining assets (after paying out the death benefits) would need to be re-registered in the new trustees’ names.
Corporate trustee - it can offer more flexibility as the trustee does not need to change, only directors of the corporate entity. Therefore, in the event of the death (or incapacity) of a member, control of an SMSF and its assets can provide more succession planning certainty.
Can you control who receives your Death Benefit?
A Binding Death Benefit Nomination (BDBN) form provides binding instructions nominating who should receive your superannuation interest.
Alternatively, if you started a pension prior to your death, you have the option to nominate a reversionary beneficiary. A reversionary pension means that the beneficiary is immediately entitled to receive the pension and does not need to wait for a trustee to make any decision with respect to your death benefit.
Who can receive a Death Benefit?
A SMSF trustee can pay a superannuation death benefit to one or both of the following:
your legal personal representative (LPR), or
one or more of your ‘superannuation dependants’.
The following Table 1 simply outlines the difference in the definition of ‘dependant’ for superannuation and tax purposes.
Source: SIS Act 1993 and ATO
Is probate required to receive a Death Benefit?
Where benefits are dealt with in a Will, it is often considered best practice to wait for probate or letters of administration first, before cashing the deceased member’s benefits. Once paid to one’s estate there is no restriction on who can receive the death benefit. In fact, your Will can leave the death benefit to a person even if they are not a dependant although the tax payable in respect of the death benefit is affected.
Is there a Death Benefit tax?
If the death benefit is paid as a lump sum to a dependant (refer to Table 1), it is tax free. However, if the death benefit is paid as an income stream or is paid to a non-dependent (refer to Table 1) or the trustee of your Estate, there may be tax to pay.
The following Table 2 summaries tax implications applicable to different components of a death benefit and its beneficiaries.
What should you do?
Regardless of the size of your superannuation benefits, it is vital that you sort out your estate plan to ensure that you have a well-prepared estate plan so that the right assets go to the right beneficiaries. You need to ensure that you receive holistic estate planning advice and have arrangements in place to review your estate plans regularly. Estate plans are not to be set and forgotten.
It may all seem to be an overwhelming task, but not if you have a specialist to assist you. It’s as simple as picking up the phone and organising an appointment with a SMSF Specialist advisor. So, what are you waiting for?
To book your complementary appointment, please call our SMSF Specialist advisor, Nataliya Sard.
(08) 8203 2546
0410 482 797