On death, a member’s super account becomes a “super death benefit”, and under SMSF law it must be cashed out a soon as practical. ATO ID 2002/141. There is no definition of “as soon as practical” by the ATO or APRA, and no time given but 6 months is generally considered reasonable.
Super does not automatically form part of a person’s estate. McFadden v. Public Trustee for Victoria  1 NSWLR 15 at 22. And confirmed in SMSFD 2008/3 Appendix 1/5
Cashing a super death benefit can be in the forms of either:
- Single or multiple part lumps sums (cash and in-specie (non-cash));
- One or more pensions (only possible to dependents, and certain restrictions with children);
- Rolled over to purchase one or more annuities (some restrictions).
The payment of super death benefits is ultimately a matter of Trustee discretion SMSFD 2008/3 Appendix 1/6 and 19, and can be paid to:
- A member’s legal personal representative (LPR – see further); or
- One or more of the member’s dependents;
- If the above 2 cannot be found, the Trustee can pay in favour of any other individual subject to the rules of the Trust Deed, and must decide in a fair and reasonable manner, with regard to all the circumstances of all parties who have or are likely to have an interest in the death benefit. Appendix 1/20.
A member of a super fund can elect to include their super (a death benefit) as part of their estate (will) by creating a binding death nomination, or binding agreement (as long as the fund rules allow) and their super can then be distributed by their will, as part of their estate. Or they can also make a binding death nomination that the Trustee must pay the super directly to specified dependents, and if those dependents cannot be found or are deceased (after proven reasonable enquiry has been made by the Trustee) and no legal personal representative (LPR) exists, the super money can only be paid to non-dependents (other people).
Alternatively, if no binding nomination or agreement is made, the remaining Trustees of the super fund may exercise their discretion and choose to pay a super death benefit to the person’s estate and again it will be distributed according to the will. Or the Trustee has discretion to pay the super death benefit to anyone they choose as long as they have made reasonable enquiry to contact dependents and acted fair and reasonably. SMSFD 2008/3 Appendix 1/9
If the member has an issue with paying their death benefit to current dependents (such as complications of divorce or other family disputes, legal advice needs to be sort. This is where binding death nominations and agreements (as long as the SMSF Trust Deed allows them) can be employed to control who gets paid.
Note that technically Binding and Non-Binding Death Benefit Nominations do not apply to SMSF, but the Trustees can accept them from members, and it need not lapse nor be required to be witnessed. Ruling 1 at SMSFD 2008/3 says … “Section 59 of the Superannuation Industry (Supervision) Act 1993 (SISA) and regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) do not apply to self-managed superannuation funds (SMSFs). This means that the governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in regulation 6.17A of the SISR.” And Appendix 1/12-15
A legal personal representative (LPR) is the person on death of the member who is the executor of a will or person to be formally appointed as executor on probate or administration of the estate of a deceased person, including the Trustee of the estate of a person under a legal incapacity, or a person who holds an Enduring Power of Attorney granted by a member of the fund and includes any other person the Superannuation Laws allow as a member’s LPR person under a legal capacity. SMSFD 2008/3 Appendix 1/24.
As in our earlier post – When a member of a SMSF dies, the Superannuation Industry Supervision Act 1993(SISA or SIS) Reg 6.21(1) directs that the member’s benefits must be ‘cashed’ as soon as practicable. The money is then paid by either a lump sum payout to dependants or to the estate, or one can have an income stream commenced and paid to a dependant (note that a child must be less than 18, or be between 18 and 25 and be financially dependent, or have a severe disability at the time of death for the benefit to be paid as an income stream).
Where there are no remaining dependants then there is very little choice. The member’s legal personal representative (‘LPR’) will become the trustee of the SMSF (an automatic appointment under well-written Trust Deeds such as what SuperBenefit provides), assets will be realised and paid out to the estate and then paid out according to the will (i.e. to nieces and nephews).
The only time that a superannuation fund could pay directly out to non SISA dependants is when, after reasonable inquiry, the remaining trustees could not find a LPR or any dependants. See our earlier post Part 1 and follow-on Part 2 tax for non-dependents.
Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and You – top right hand side above.
If you have any questions, why not give us a call – it’s FREE also!
No obligation. 0407 361 596, Paul.