Superannuation Funds And Death

When a loved one dies, the last thing many family members think of is how to deal with their superannuation interest.

However, time is of the essence when it comes to death and superannuation. So if you are the trustee of a Self Managed Super Fund (SMSF) what are your obligations when a member dies?

Read on to find out how the death of a member will effect your fund.

Effect of SMSF member or trustees death

On the death of a member the trustee is required to deal with the member balance of the deceased.

It is their responsibility, as set out under the SMSF trust deed.

Sometimes the trustee is actually the dead member, which leaves it up to the executor of the deceased to deal with the SMSF monies on their behalf.

Once the funds are dealt the executor will usually wind up the fund.

If the fund has more than one member and the trustee is a company, then the remaining director and the executor deal with the funds.

Once all monies are disbursed, the executor resigns as co-director.

The deceased’s member balance

As soon as the member dies their balance must be paid out.

A super fund member can nominate a person to receive their super.

This is done by providing a binding death benefit nomination to the trustee, in writing, while they are alive.

Importantly, this nomination usually overrides the will of the deceased so it can be important in estate planning.

Who is the payout made to?

The payout can be made to whoever is listed as a beneficiary on the nomination.

If the beneficiary meets the specific super fund definition of ‘dependent’ then they can receive the money tax free.

Generally, only their dependent spouse and dependent children will meet this definition. Everyone else must pay tax on the payout depending on what the member balance is made up of.

Will the member balance be taxed?

If the member balance is made up of “taxable” funds (e.g. past employer contributions, investment profits) it is usually taxed at a maximum of 15%.

If the member balance is made up of “tax-free” funds (e.g. past personal after-tax contributions) it is usually not taxable at all.

Need tax advice for your SMSF? Please enquire online today to get in touch with our expert team.

Investments of the deceased SMSF member

The process of “paying out a death benefit” involves physically selling investments and finding enough money to pay out the amount owed.

This may seem like commonsense to most, but in practice it can be very tricky.

Take for example, a SMSF with two members who have equal, 50% member balances. The total value of the fund is $700,000. Their assets include:

  • $50,000 of cash
  • $150,000 investment in a 5 year term deposit.
  • $200,000 of listed shares at market value.
  • $300,000 investment property at market value.

If one member dies, their member balance of $350,000 must be paid out as soon as practicable.

How will this be paid out?

A variety of questions arise when determining how to pay out the members benefit.

Where will the trustee come up with the cash? Do they break the term deposit? Do they sell their shares in a low market? Do they sell the property and risk a lower asking price?

Death can impose a particularly tricky responsibility for the trustee as they must choose what assets to liquidate, in order to pay out the benefit.

Good investment advice can help but it is always best to plan ahead. If one of the members is either ill or getting into their older years, some funds choose to progressively liquidate the investments at a time and price that suits them.

That way they are in a better position to pay out a benefit, should the need arise.

For help with your SMSF please enquire online today and our SMSF financial specialists can give you the advice you need to manage your super fund.

Effect of death of the deceased’s super funds pension

When a self-managed super fund is paying out a pension to a member, the assets supporting that pension are tax free.

So if a member balance consists of cash and shares, the interest and dividends on those assets are not taxed. This also applies to any capital gains on asset sales.

But once a member dies, the pension ceases and the story changes dramatically! Please read on to find out more.

Tax on the sale of assets after member’s death

Once a member dies, any assets sold are subject to Capital Gains Tax (CGT) and all income is taxable.

From the point the member dies up until the time that the money is paid out, the fund pays tax on all income.

The real worry here is that assets will need to be sold to pay out the benefit, so there can be a significant amount of capital gains tax.

How much capital gains tax could the fund pay?

Take the example of a fund with one member. It controls a share portfolio worth $1,000,000, but with a tax cost of only $600,000. If the fund sold these assets during its “pension phase” capital gains tax would not be payable.

However, if the member dies, the liquidation of these assets will then give rise to at least 10% tax of $40,000 ($400,000 at 10%).

This is an unfortunate surprise. Normally funds will try to keep these unrealised gains to a minimum, just in case.

However, did you know there is a new tax rules you could use to completely avoid this “death tax”? Assuming you meet the rules and do the right things after death it is possible. Ask us how.

Speak to us for help with your fund!

The death of a SMSF member can have a substantial impact on the fund. The trustee has a variety of obligations, including those owed to the Australian Taxation Office (ATO) and the deceased person.

To find out how we can help with your SMSF if a trustee or member dies, please enquire online today and our experts in Self Managed Super Funds will call you to discuss your situation.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.