Key Highlights

•  Where there is no valid nomination, the remaining trustees decide how a death benefit is distributed according to the trust deed and super law.

•  Dependants can receive a death benefit as a lump sum or an income stream, and a lump sum paid to a dependant for tax purposes is tax free.

•  The ATO says a fund has six months to restructure after a member's death, and a corporate trustee can make the transition simpler.

Many people assume their will covers everything they own. For members of a self-managed super fund, that assumption can be costly. Superannuation is held on trust by the fund's trustees, and the ATO's guidance on the death of a member is explicit that trustees must follow the fund's trust deed, even where it differs from the member's will.

That makes succession planning inside an SMSF a separate exercise from estate planning outside it, and one that deserves regular review.

What trustees must do when a member dies

The ATO sets out the core obligations for remaining trustees. They need to identify who the deceased member's super should be paid to, deduct any tax that applies and meet PAYG withholding obligations, and pay the death benefit as soon as possible after the member's death. They must follow the trust deed, consider any binding or non-binding death benefit nominations and keep records of all decisions.

Trustees may also need to sell assets to pay the benefit, and the ATO encourages them to review whether the fund's structure still suits the new circumstances.

Who can receive a death benefit

Superannuation law limits who can receive a death benefit. Under the ATO's guidance, dependants include a spouse or former spouse, a child, and a person in an interdependency relationship with the deceased. A benefit may also be paid to the member's legal personal representative, usually the executor, who then distributes it under the will.

Where there is no valid nomination, the remaining trustees decide how the benefit is distributed according to the trust deed and super law. A binding nomination that is valid under the deed generally directs that decision, while a non-binding nomination is something trustees consider but are not bound to follow. Whether a nomination is valid depends on the terms of the deed, which is why the deed and any nomination should be reviewed together.

Lump sum or income stream

Dependants can receive a death benefit as a lump sum or as an income stream. The income stream can be a new pension or a continuation of an existing reversionary pension. Non-dependants must receive a lump sum, and the ATO says it can be paid as no more than two amounts: an interim and a final lump sum.

The form of payment can have tax consequences. The ATO explains that a lump sum paid to a dependant for tax purposes is tax free and the fund does not withhold tax. An income stream, or a payment to a non-dependant or to the trustee of a deceased estate, may be taxable, and the fund needs to work out the taxed and untaxed elements and withhold where appropriate. The definition of dependant differs between superannuation law and tax law, so trustees should check both.

Restructuring the fund after a death

A death often changes the fund's trustee arrangements. The ATO says the fund has six months to restructure after a member's death. Options include appointing another trustee, establishing a corporate trustee, or transferring the remaining super to another fund and winding up the SMSF. Changes in trustees must be notified to the ATO within 28 days.

For a two-member fund with individual trustees, this deadline can arrive quickly while the surviving member is also dealing with grief and the estate. A corporate trustee structure can make the transition simpler, because the company continues as trustee and only its directors change.

Practical considerations for trustees

Trustees can reduce uncertainty for their families by taking a few steps while everyone is well:

  • read the trust deed's provisions on death benefits and nominations;
  • confirm whether any nomination is in place, whether it is binding, and whether the deed requires it to be renewed;
  • check whether any pension is reversionary and to whom;
  • consider who would control the fund after a death and whether enduring powers of attorney are in place; and
  • record the plan in an exit strategy signed by all trustees, as the ATO recommends.

Disputes over SMSF death benefits have reached the courts in the past, often because documents were unclear or inconsistent with the deed. Specialist legal advice is worthwhile when drafting or updating nominations.

Hypothetical example

A hypothetical member with an adult, financially independent son and a second spouse has a will leaving everything to the son. The fund's deed allows binding nominations, but the member never made one. When the member dies, the surviving spouse is the only remaining trustee, and, while restructuring the fund within the six-month window, decides how the benefit is paid within the deed and super law. The will does not determine the outcome, and the son may receive nothing from the fund unless the trustee decides otherwise.

Takeaway

In an SMSF, the deed and any valid nomination drive where a death benefit goes. Members who want certainty should review their nominations, pension documents and trustee structure together, and make sure the people who would be left in control of the fund understand the plan.