Masterclass SMSF – Binding Death Benefit Nominations in SMSF

Binding Death Benefit Nominations in SMSF

When a member of a self-managed super fund (SMSF) passes away, the SMSF typically distributes a death benefit to a dependent or another beneficiary of the deceased.

It is important for this distribution to occur promptly following the member’s death.

If the recipient is a dependent of the deceased, such as spouse or child (see below), the death benefit can be provided in the form of either a lump sum or an income stream. The income stream may be a new arrangement or a continuation of an existing one.

In the event that the recipient is NOT a dependent of the deceased, the death benefit must be paid out as a lump sum.

SMSF members can nominate who will get their benefits when they die.

Members of SMSFs have the option to specify who will receive their benefits upon their death. A binding death benefit nomination instructs the trustee to allocate the benefit to a legal personal representative or a dependent.

In the absence of a binding nomination, the remaining trustees will determine the distribution of benefits by taking into account the trust deed and superannuation laws. It is essential to adhere to the trust deed, even if it differs from the member’s will.

To understand how death benefits can be paid you need to know who is a dependant.

A dependent is typically defined as a spouse, or someone in a close personal interdependent relationship, or a child who is under 18, has a disability, or is between 18 and 25 and financially reliant on the deceased. A dependent can receive either a lump sum or an income stream, while a non-dependent can only receive a lump sum (payout the member account).

Lump sums paid to a dependent are tax-free, whereas those paid to a non-dependent will incur taxation* (on the taxable portion). These lump sums can be disbursed in the form of cash or non-cash assets, such as shares or property.

*It’s important to note that the trustee may be required to withhold tax from a death benefit, and this process can be intricate, contingent on various factors. If tax withholding is necessary, the trustee must register for PAYG withholding and complete additional ATO forms.

Advance planning is advisable, as unresolved disputes over the payment of death benefits can potentially lead to costly court proceedings.

For more refer to the ATO site HERE as well as – SMSFD 2008/3: Binding death nominations.

Interested to know what self-managed super (SMSF) is all about, and if it is for you?

See the slides SMSF Roadmap Overview.

If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to find the right expert to answer your question – it’s FREE also!

No obligation. 0407 361 596, Paul.