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What happens at death of an SMSF member?

Do you ever wonder what happens to your super after you die? This is particularly important if you have an SMSF. No one wants to burden others with planning a funeral and figuring out what to do with their SMSF, so let’s look at what happens when an SMSF member dies.

Compulsory payment upon death of a member

First, death is a compulsory payment situation. It means the deceased’s super cannot remain in their SMSF. It must be paid either to their dependants or their legal personal representative “as soon as practicable”. The Tax Office will normally allow up to six months for payment. If it takes more than six months, then the SMSF trustee may need to explain the reason for the delay. The Tax Office may accept reasons such as the death benefit nomination being challenged by beneficiaries, or the uncertainty of eligible beneficiaries. But if the trustee just took their time to pay out the death benefit without good reason, then the Tax Office may take compliance action against the SMSF.

Depending on the SMSF’s trust deed, the deceased’s super may be paid either as a pension, a lump sum death benefit or both. However, a pension is only available to the deceased’s dependants such as a spouse, a child under the age of 18, a child up to age 24 who was financially dependent on the deceased, and a child of any age with a disability. Other dependants such as an adult child and the legal personal representative can only receive a lump sum death benefit.

If the deceased was receiving a reversionary retirement pension, then the pension can revert to their nominated beneficiary. If the pension is non-reversionary, then it will cease upon death, and can be paid to the surviving spouse either as a new pension, a lump sum or both. Paying the deceased’s pension to their spouse does satisfy the compulsory payment situation as it is no longer in the deceased’s super account.

The spouse of the deceased

Under current law, a transition to retirement income stream cannot revert to the deceased’s spouse unless the spouse has met a condition of release, such as having reached the age of 65 or reached their preservation age and retired. This does not mean, however, that a new pension cannot commence from the SMSF and be paid to the spouse. In addition, money in the deceased’s accumulation account can be paid as a new pension to the surviving spouse. The surviving spouse needs to ensure that if they have their own retirement pension it does not exceed the current transfer balance cap of $1.6 million when the new pension is added to it.

As the deceased’s transfer balance cap is not transferable to their spouse, the spouse can either reduce their pension by putting money back into their accumulation account, or pay out some of their pension as a lump sum benefit prior to receiving the reversionary pension or the new pension. The spouse cannot put the deceased’s super into their accumulation account.

If the deceased’s pension is reversionary, the amount counted towards the spouse’s transfer balance cap is the amount in the deceased’s retirement pension account on the date of death. It is counted towards the spouse’s transfer balance cap twelve months from the date of death. If the pension is non-reversionary then the amount paid to the spouse will count on the date it is paid.

A lump sum death benefit can be paid using assets. However, a pension cannot be paid using assets. If a pension is either partially or fully commuted, then the commutation amount can be paid as a lump sum death benefit using assets. The pension recipient needs to ensure that the minimum pension payment requirements are met prior to the commutation.

SMSF structure

The structure of the SMSF is important. If an SMSF has an individual trustee structure and it becomes a single member SMSF, it has six months to restructure. If the surviving spouse wants the SMSF to remain under an individual trustee structure, a second trustee will need to be appointed prior to the expiration of the six-month period. The remaining trustee can make decisions for the SMSF during the six-month period, which includes paying out the deceased’s super.

It is important for SMSF members to take an interest in superannuation law. By understanding the law, members can ensure their super is passed onto their loved ones with a minimum of fuss.

 

Monica Rule is the author of The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English. See www.monicarule.com.au for more details. This article is general information and does not consider the circumstances of any individual.

To purchase the latest copy of The Self Managed Super Handbook (7th Edition), please click here. Stocks are limited.

4 Comments
George Paolucci
April 27, 2022

I am interested to know if individual trustees are disadvantaged when one of two members pass away ( husband and wife sanario ) I thought I read somewhere that a corporate SMSF has tax advantages on death as the transfer balance cap. portion of the deceased member can be transferred into the remaining members transfer balance account. ( tax free status )
Sorry if I have the terminology wrong.

Adrian
September 08, 2018

Could you please explain what happens regarding unrealised capital gains in the super fund on the death of the last surviving member. For example, is CGT payable on these and then the whole taxable part of the fund taxed at 15% plus medicare levy (assuming no dependents)?

Rahul
September 07, 2018

Hi Bruce,
Refer to this factsheet from the CSS website - in particular page 6 and the example relating to Bill and Mary.

https://www.csc.gov.au/-/media/Files/CSS/Factsheets/CSF33-css-the-transfer-balance-cap.pdf

It would seem that due to the unique ‘bereavement’ feature built into the CSS scheme, the transfer balance cap credit to the reversionary spouse is based on the pre death defined benefit payments. This is despite the pre death payment rate being temporary and after 7 fortinights, the rate to the reversionary, reducing to 85% of the pre death rate.

Bruce Bennett
September 06, 2018

Thanks again for sharing Monica's advice to Cuffelinks readers. A portion of my retirement income is a Commonwealth Superannuation Scheme pension to which the government nominated a value based on the pension paid for the $1.6m transfer balance cap. Upon my death 85% of the pension I currently receive will revert to my spouse.

With regards to superannuation schemes that pay a reduced pension to a surviving spouse, I would be grateful if a reader could clarify whether or not, on the death of a CSS (or similar) pensioner, the notional amount counted towards a spouse’s transfer balance cap is reduced to reflect this.

 

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