Tag Archives: Death

Superannuation death benefits – review succession plans

Regardless of the size of your superannuation benefits, it is vital that you sort out your estate plans to ensure that you have a well prepared estate plan so that the right assets go to the right beneficiaries.  You need to make sure that you get holistic estate planning advice and have arrangements in place to review your estate plans regularly. Estate plans are not to be set and forgotten.

First and foremost it is important to understand that the payment of your superannuation death benefits are covered by the rules of your SMSF trust deed and do not automatically form part of your Estate for distribution in accordance with the terms of your Will. As trustee of your SMSF, you will need to make sure that you have read and understood your SMSF’s trust deed and that you comply with it at all times.

On your death, one option is to rely on the SMSF trustee’s wide discretion to determine who, within the operation of the law, will receive your death benefit and how much each beneficiary will receive.

The alternative is to remove the trustee’s discretion which gives you greater control in deciding how your superannuation death benefits will be cashed. This may be relevant if:

  • You want certainty over your estate plan;
  • You have a blended family and want all family members to benefit from your superannuation on your death;
  • It is anticipated that there will be conflict amongst your potential beneficiaries;
  • It is a possibility that there may be conflict amongst the remaining trustees of your SMSF upon your death;
  • There is a risk that those controlling the SMSF post your death may not cash your death benefits in accordance with your preferences.

Subject to the specific terms of your SMSF trust deed, ways in which you could consider removal of trustee discretion include:

  • Having a valid and current binding death benefit nomination (BDBN) in place;
  • Specifying in your SMSF trust deed how death benefits will be distributed; or
  • Nominating a reversionary beneficiary to whom your pension will automatically revert to on your death.

To ensure that your death benefits are cashed in accordance with your wishes, it is critical to ensure that your estate plans are comprehensive and that you understand the ownership and control of your assets on your death. It is also important that any superannuation death benefit advice you receive is consistent and complimentary to your overall estate plans and is not in isolation to the other.

At a minimum, we recommend that trustees have their SMSF trust deed reviewed to ensure maximum flexibility when dealing with death benefit payments. It is also recommended this be done alongside a review of any BDBN(s) to ensure that they too are valid and provide certainty in how death benefits will be dealt with upon your death.

When considered in light of an ageing Australia, the value of assets invested in SMSFs and recent court cases, having the correct SMSF documentation and process is essential to minimise the risk of litigation from disappointed beneficiaries to allow a safe passage of death benefits to your intended beneficiaries.

So what should form part of a comprehensive SMSF estate plan? At a minimum it should contain:

  • An up-to-date Will
  • An up-to-date enduring power of attorney
  • An up-to-date SMSF trust deed, including prior variations
  • An up-to-date death benefit nomination (if applicable)
  • Up-to-date pension documentation (if applicable)
  • All trustee documentation, including details of directors and any trustee changes

Superannuation Death Benefit Limitations

As an SMSF trustee, you need to take special care when paying death benefits as you are responsible for ensuring that the payment rules are met. Strict rules apply, affecting who can receive a death benefit, the form in which the death benefit can be paid and the timing of such a payment.

Firstly, death benefits can only be paid either to dependants of the deceased member or the estate of the deceased.

Second, the law limits the group of dependants who are eligible to receive a pension on the death of the deceased member.

Finally, trustees must pay a death benefit as soon as possible after the death of the member. Additionally, each death benefit interest can only be paid to each dependant as either:

  • a maximum of two lump sums (an interim and final lump sum), or
  • a pension or pensions in retirement phase, or
  • a combination of both.

It is the limit of a maximum of two death benefit lump sums per dependant that trustees need to keep track of to ensure that the cashing rules are not inadvertently breached, especially where the death benefit is being paid as a pension.

Given the account-based nature of death benefit pensions that can be paid by an SMSF trustee, an SMSF member is generally afforded the flexibility to nominate to convert a death benefit pension into a lump sum payment. This process is generally referred to as the commutation of a pension although may be subject to specific restrictions found in a trust deed.

A partial commutation is where the beneficiary requests to withdraw a lump sum amount less than their total pension entitlement, allowing their death benefit pension to continue. This is common where members withdraw their required minimum drawdown as a pension with any additional income needs met by accessing multiple lump sums from their pension account. This strategy allows the death benefit pension to continue without breaching the superannuation death benefit rules, despite payments in excess of the maximum two lump sum limit.

A full commutation will result in the death benefit pension ceasing at the time the member decides to withdraw their entire pension entitlement as a lump sum. Despite the number of lump sum death benefits previously received, the law allows the beneficiary to roll over the lump sum resulting from a full commutation to another superannuation fund for immediate cashing as a new death benefit pension.

However, where a lump sum resulting from the full commutation of a death benefit pension is paid out of the superannuation system, further clarity is being sought from the ATO to ascertain whether or not this will be treated as an additional lump sum death benefit that would count towards the maximum two lump sum cashing limit. Until further clarity is provided by the ATO, caution needs to be exercised before a death benefit pension is fully commuted and paid to the dependant, especially where the dependant has previously received a lump sum death benefit.  

As an SMSF trustee you need to be aware of the restrictions placed on the payment of death benefits to eligible dependants of a deceased member. Trustees who ignore these limitations risk breaching superannuation standards and potentially being liable to be fined by the Regulator.


Superannuation death benefit limitations

As an SMSF trustee, you need to take special care when paying death benefits as you are responsible to ensure that the payment rules are met. Strict rules apply, affecting who can receive a death benefit, the form in which the death benefit can be paid and the timing of such a payment.

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Shield Wealth and Stellar Super, in conjunction with Paul Salinas, from Campbell & Co Lawyers are hosting boardroom sessions in March.

Estate planning is a subject that we don’t like to think about but in its simplest form, it is just about ensuring peace of mind. It is about making sure that the investments you make now are passed on to your family or beneficiaries in the most effective way.

Developing an effective estate plan will ensure that:

• Any tax payable is minimised

• The ownership of assets passes to the right beneficiaries

• The assets are protected if any beneficiary has any legal issues

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