Death of a Member
What happens to your super when you die?
What happens to your super when you die?
Death is a significant trigger event for a review of the viability of an SMSF.
When a member dies, the remaining fund member or members, may decide they do not wish to continue with the SMSF. This is particularly the case if the deceased member was the driving force behind setting up and running the SMSF and the remaining trustees may not be capable or willing to continue in the role of trustee.
The super benefits are dealt with as per death benefit agreement.
In the simplest circumstances, where the surviving member of the SMSF does not wish to continue with an SMSF, there may be no need to appoint anyone else in the role of trustee. Provided the trustee can pay out the required death benefit, rollover their entitlements to an alternative superannuation provider and wind-up the SMSF within six months of the death of the member, then the fund is deemed to have satisfied the definition of an ‘SMSF’ under s17A of SISA.
However, where the payment of a death benefit involves indivisible or illiquid assets or there are assets, such as business real property, which the family group do not wish to dispose of, a Legal Personal representative (LPR) may need to be appointed to assist with the payment of death benefits before a fund can be wound up.
The LPR of the deceased member can, and usually does, step in to act as trustee in their place until such time as all death benefits are paid or commence to be paid (s17A(3)(a) of SISA). While the law envisages that on death the LPR may act in the place of the deceased, it is not compulsory, so it’s important that the rules of the fund allow this to occur.
Once a death benefit has been paid or commences to be paid, the LPR must resign as trustee and the SMSF has up to six months from this time to wind- up without having to satisfy the definition of a SMSF.
If you have a valid will in place when you die, most of us assume it’s simply a matter of our executors taking care of all the paperwork and paying out our remaining assets to our beneficiaries in the proportions listed in the will.
But in fact, when it comes to your super account, what you state in your will doesn’t necessarily decide who gets your retirement savings, as the trustee of your super fund is not required to take your wishes into account.
This means you need to ensure you nominate a beneficiary if you want a say in who gets your retirement savings after you die.
Super law considers a person to be the dependant of a deceased super fund member, if at the time of their death, they were:
If you do not make a death benefit nomination, the trustee of the super fund may decide to pay your death benefit to your estate, or it may use its discretion to decide which of your eligible beneficiaries receive the death benefit.
These are the most common type of death benefit nominations and are offered by most industry, retail and corporate super funds.
With this type of nomination, the trustee of your super fund considers the benefit nomination you make, but the trustee retains the final say over which of your beneficiaries receives your super and in what proportions.
This allows the trustee to consider factors such as your personal relationships and circumstances when you died. It may then make a different distribution to your nomination if it deems this is necessary (such as if you have a new spouse, a different financial situation or if your beneficiary is bankrupt).
It can take time for the fund trustee to make a death benefit decision. Your beneficiaries may not receive your death benefit for many months if the trustee needs to investigate your personal circumstances.
The trustee may also decide to pay your death benefit directly to your legal personal representative (the executor of your estate). If you don’t have a valid will, your super death benefit and the rest of your estate will then be distributed as required under the intestacy laws applying in your state.
If you make a valid BDBN, the trustee of your super fund must pay your super death benefit to the beneficiaries you nominate, in the proportions you listed. A binding death benefit nomination overrides the normal trustee discretion on payment of a super death benefit.
BDBNs normally lapse after three years unless they are renewed. If you do not renew your BDBN, your super fund will consider you do not have a death benefit nomination in place.
If you are a member of an SMSF and want to make a BDBN, you need to check the trust deed of the SMSF to see if it allows this type of benefit nomination, as not all trust deeds permit them. To be valid, your nomination also needs to be in line with the rules of the SMSF’s trust deed.
A BDBN can be useful if you have concerns that your wishes in relation to the distribution of your super benefit might not be carried out when you die, or made in the proportions you wish. This may occur in situations such as blended or second families, or where you have responsibilities for a disabled child.
A non-lapsing BDBN normally never expires and remains in place until you cancel it or replace it with a new benefit nomination.
This means you do not need to update your death benefit nomination in writing every three years. With a normal BDBN, you face the risk you could forget to renew your nomination every three years, resulting in the trustee once again having the discretion to decide who receives your super death benefit (and any life insurance in your super account).
Non-lapsing BDBN are not offered by every super fund, so you need to check with your fund.
You are considered a tax dependant of a deceased super fund member if at the time of their death you were:
