What happens to my SMSF when I die?
By Colin Lewis
There are many reasons for setting up a self-managed superannuation fund (SMSF). It could be the desire to take control of your super, or wanting to invest in something that can only be held in an SMSF, such as direct property – with the spotlight on investment diversification, more attention must now be given to formulating a fund’s investment strategy to ensure these investments are made correctly.
Armed with their reasons for having an SMSF, people generally don’t think twice about establishing one, but give little to no thought to the fund’s succession – the things that happen when a member dies or loses legal capacity.
A key requirement of an SMSF is each member must be a trustee or a director of the corporate trustee company.
Under trust law, a trust with an individual trustee who is also the only beneficiary, is invalid. You can have a single member SMSF and special rules apply to ensure it complies with trust law. These rules depend on whether the fund has an ‘individual trustee’ or ‘corporate trustee’ structure.
For a single member SMSF with individual trustees, an additional trustee is required who is not a member of the fund – nor an employee of the member, unless they’re related. Where a corporate trustee is used, either the member can be the sole director, or an additional (non-member) director is required.
On death, the member ceases to be a trustee or a director, and most trust deeds and company constitutions require this.
So, what happens?
For individual trustees, the trust deed dictates who then controls the fund and for corporate trustees, it’ll be the company constitution.
Accordingly, it’s critical to read the deed (and constitution) to see what happens next.
Who holds the purse strings?
While you may have a valid binding death benefit nomination (BDBN) directing the distribution of your benefits, it’s critical to pass control of your fund to a trustworthy person to ensure this happens.
With SMSF succession planning, you cannot be assured that a BDBN is enough to ensure your beneficiaries will readily receive your death benefits. Whoever controls your fund after death determines how and to whom benefits are paid.
If there are two individual trustees and the sole member dies, then the remaining trustee has total control of the fund. Accordingly, you would want to be confident the person you’ve selected as the other trustee will exercise their power in accordance with your wishes.
If the only fund member was the sole director of the corporate trustee, then following their death there will be no one running the company. Consequently, their benefits may be locked-up until the company’s shareholder appoints a replacement director. If the member was the only shareholder, then appointing a new director requires probate which takes time. In this case, it may be desirable to have two directors to enable the company to continue operating.
Time is of the essence
Following a member’s death, superannuation law allows their legal personal representative (LPR) – typically the executor of the estate – to stand in as trustee/director until such time as their death benefits start to be paid – which must be done as soon as practicable but generally within six months of death.
This normally happens but it’s not automatic and the courts have determined this to be the case. So, a member’s LPR – often also their beneficiary – should not assume they will automatically step into the role and control the fund.
For corporate trustees, most company constitutions give the majority shareholder(s) the power to appoint a new director. This can be problematic in a two-director company where each director holds one share. If the LPR only represents the shareholding of the deceased member, they may be unable to vote themselves in as a director, leaving the surviving director with control of the company and thus the SMSF.
After the death benefits start to be paid, the LPR must resign as trustee/director and the trustee structure must then meet the requirements of super law for the fund to continue being an SMSF. However, there is a six months grace period for restructuring the trusteeship of the fund.
If an LPR is not appointed – e.g. there is no LPR or the LPR doesn’t accept the appointment – the trustee structure must meet the SMSF definition from the date of death, but again there’s the six months grace period.
To be a compliant single member SMSF where the fund had two members with individual trustees, the surviving member must appoint an additional trustee. Alternatively, they could restructure to a corporate trustee where they are the sole director. The trust deed will need to be amended to reflect this change.
Where the fund had two members with a corporate trustee, the surviving member will be the sole director – constitution permitting – unless they appoint an additional director.
It’s important to notify the ATO and ASIC of the changes.
Ensure effective succession of trustee
If you have an SMSF, succession planning is critical – particularly with blended families.
You need to ensure certainty over control of your SMSF after death. To achieve this, make provision in the fund’s deed for the automatic appointment of a successor trustee. If there’s a corporate trustee, make provision in the constitution for the automatic appointment of a successor director and also ensure your will deals with your share(s) in the trustee company.
If the trust deed/company constitution provides for a successor trustee/director, then upon the death of the member, the person nominated as the successor trustee/director steps in.
These measures are aimed at avoiding instances where the surviving trustee/director determines not to pay the death benefit in accordance with your nomination.
There would be nothing worse than the wrong person(s) being left in control of your SMSF, which may have the ramification of the wrong person(s) ending up with your super, or your rightful beneficiaries having to go through a protracted, costly, and uncertain legal battle over your benefits – unlike other super funds, SMSFs do not have access to the Superannuation Complaints Tribunal.