Establishing a self-managed superannuation fund (SMSF) is relatively easy, however how much thought is given to what happens to your SMSF when an SMSF member passes away?
In our time assisting retirees, we have seen well executed estate planning strategies, but unfortunately we have also seen situations where hundreds of thousands of dollars in tax has been paid, and witnessed disputes between surviving trustees over who is entitled to deceased superannuation.
It is crucial that careful planning and thought is given to the beginning, and the end of a SMSF to ensure that the SMSF member balance is paid to the right person on passing.
This article aims to:
- Outline what happens to your superannuation when you die
- What active steps you can take now to ensure your superannuation is passed to the correct beneficiary; and
- How to alleviate future stress on family members.
Given how broad this topic is, we have limited the discussion to specifically refer to SMSF’s.
What happens to your Super member balance when you pass away?
The passing of an individual triggers an automatic cashing event, meaning that their superannuation member balance must be paid out to their beneficiary. As an individual’s superannuation does not form part of their Estate assets, it is not automatically distributed according to their Will.
To ensure that your Superannuation member balance is passed on to the correct beneficiary, individuals can complete a Binding Death Benefit Nomination (BDBN).
What is a Binding Death Benefit Nomination, and what makes it valid and binding?
A BDBN is a document to legally bind who is to receive your superannuation benefits in the event of your death.
For a BDBN to be considered binding, it must be valid. One key requirement is that you must nominate a dependent on your BDBN.
A dependent includes:
- A spouse (including de facto, opposite and same sex)
- Children of any age (including adopted or ex-nuptial)
- Any person(s) financially dependent on the member
- Any person(s) in an interdependency relationship with the member
- A legal personal representative (for example, your Estate)
Your nomination should also be witnessed by two people over the age of 18, who are not listed on the nomination.
BDBN’s can be both lapsing and non-lapsing, depending on the nomination itself and the Trust Deed rules. BDBN’s can be renewed, updated, changed or revoked at any time. They can also be drafted in a way to have both primary and secondary beneficiaries, with the latter coming into effect when the primary beneficiary pre-deceases you.
What happens to my SMSF if I don’t have a BDBN when I die?
Multiple member SMSF
If you don’t have a BDBN when you pass, your BDBN has lapsed, or is invalid altogether, the surviving trustee chooses where your super is distributed. The list the trustee can choose to pass your super benefits onto is limited – it must be a dependent of you, which we listed earlier in the article.
Sometimes, leaving this decision to the surviving trustee is not a bad thing, for example if they are your spouse and they would have received your entire super balance anyway.
However, occasionally, this can be problematic, for example if you had other beneficiaries who thought they deserved some of your super (for example children), or you had intended for your super to be distributed to a different dependent.
Single member SMSF
If you are the only member and trustee (or director of the trustee company) of your SMSF, your Will holds even greater importance. Generally, the executor of your Estate will step in, and control what happens to your super (again, only within the constraints of who can receive your super).
Given all of this, not having a BDBN doesn’t mean that there will be no one representing your interests when you pass. However, it does leave either the surviving trustee or the executor of your Estate with considerable power to dictate where your superannuation is distributed to. This risk is even greater in circumstances where your overall Estate plan might not be as simple as others.
When I die, does my beneficiary pay tax?
Death tax, as it’s crudely referred to, is dependent on who the beneficiary is. If the beneficiary is a tax dependent, for example your spouse, there is no tax payable in the beneficiaries’ hands. If your beneficiary is a non-tax dependent, for example an adult child or your Estate, the taxable component of your superannuation member balance is taxed at 15% plus the Medicare Levy.
If you are interested in understanding what the taxable component of your superannuation balance is, please contact us, alternatively, this is generally available on your member statement.
When your beneficiary is your spouse, they generally have the option of retaining your member balance inside super, up to the beneficiaries’ respective pension balance transfer cap. As income is concessionally taxed inside super as compared to outside, there can be advantages in retaining as much of your deceased spouse’s benefits inside superannuation.
What steps can I take now?
Step 1: review your BDBN
The first step everyone can take now is ensuring they have an up-to-date BDBN, that reflects how you want your superannuation benefits to be distributed on passing. You should also check that it is valid and has not lapsed. This is relevant if you have superannuation inside an SMSF, as well as in an industry or retail fund. As previously mentioned, nominations can have a number of different features, so it is vital to ensure that it reflects your personal circumstances and coincides with the rules of your SMSF Trust Deed.
If you would like assistance in reviewing and updating your nomination, please contact us.
Step 2: review your Will
Another area every individual can review is their overall Estate plan and specifically their Will. An individuals Will can come into play in superannuation, so it is important that your Estate’s beneficiaries and executor is up to date. We partner with a number of specialised legal professionals, so please contact us if you’d like to review this.
Step 3: review your Trust Deed
Another step trustees can take is checking that their Trust Deed is up to date. There have been considerable changes to superannuation rules over the years, and the rules in some Deed’s regarding death benefits can be more inhibitive than others, so it is recommended that the Deed’s rules are reflective of current legislation.
If you would like assistance in updating your Trust Deed, please contact us.
Step 4: reviewing trustee structure of your SMSF
If your SMSF is operating under an individual trustee structure, there is a requirement that there are at least 2 trustees in the fund. This can become problematic in the event that one trustee passes away, as the surviving trustee will need to undergo a change of trustee to appoint another individual or a company if they wish to keep the SMSF. As the legal name of each investment also needs to be updated, this process is both time consuming and generally the last thing someone wants to do after losing a loved one.
To alleviate this future stress, individual trustee SMSF’s can choose to appoint a company to act as trustee while willing and able.
If you would like to update your trustee from individual to corporate, please contact us to begin the process.
Understanding what happens to your SMSF when you pass is very important. You need to ensure you have an appropriate plan, with the correct legal documents, to guarantee that your super is passed onto the intended beneficiary in the most tax effective way. We can help in a number of different ways, so please contact our office if you require any assistance.
Expertise and support when you need it.
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.