Death of an SMSF member including incapacity
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
What happens to my SMSF when I die or lost legal capacity?
So you have an SMSF, but are you prepared for one of the most significant events that may occur while running it – the fund’s succession?
Generally, people don’t think twice about setting up an SMSF but give little to no thought about what happens when a member dies or loses legal capacity.
Without careful planning, control of an SMSF could be lost, resulting in entitlements being paid to the wrong person(s).
This is one potential headache members of other super funds won’t have because those funds are run by professional trustees and succession is not an issue. Sometimes with complex estate planning needs, it can be better leaving it to the professionals to implement your wishes.
A key requirement of an SMSF is each member must be a trustee or a director of the corporate trustee.
Under trust law, a trust with an individual trustee who is also the only beneficiary, is invalid. You can have a single member SMSF with special rules applying to ensure it complies. These rules depend on whether the fund has individual trustees or a corporate trustee.
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/director and most trust deeds and company constitutions require this.
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?
Whilst 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. You cannot be assured a BDBN is enough for your beneficiaries to readily receive your super.
Whoever controls your fund after death determines how and to whom benefits are paid. Worst-case scenario, they may decide to ignore your wishes leading to costly and time-consuming legal proceedings for the rightful beneficiaries.
Where there are two individual trustees and the sole member dies, the remaining trustee has total control of the fund. Accordingly, you must 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 after 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 are 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 confirmed this. So, a member’s LPR – often also their beneficiary – should not assume they will automatically step into the roll 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 the SMSF.
Once 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 trusteeship of the fund.
If an LPR is not appointed – there isn’t one or the LPR doesn’t accept the appointment – the fund’s trusteeship must meet the SMSF definition from date of death, but again there’s six months to do this.
Becoming a single member SMSF where the fund had two members with individual trustees requires the surviving member to appoint an additional trustee. Alternatively, they could restructure to a corporate trustee where they become the sole director. The trust deed may need amending 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.
The ATO and ASIC must be notified of the changes.
Ensure effective succession of trustee
SMSF succession planning is critical, particularly with blended families.
You must ensure certainty over control of your SMSF after death. To achieve this, make provision in the fund’s deed/company constitution for the automatic appointment of a successor trustee/director. With a corporate trustee, ensure your will deals with your share(s) in the trustee company.
Where the deed/constitution provides for a successor trustee/director, then upon a member’s death, the nominated successor steps in.
These measures are aimed at avoiding instances where the surviving trustee/director decides not to pay the death benefit in accordance with your nomination.
There would be nothing worse than someone gaining control of your SMSF who pays your super to the wrong person(s) – or your rightful beneficiaries having to go through a protracted, costly, and uncertain legal battle over your benefits.
When it comes to planning for loss of capacity, ensure you have an enduring power of attorney enabling someone to make decisions on your behalf in relation to your fund membership.
With individual trustees, ensure the deed removes you as trustee on incapacity and appoints your LPR if not already a member, and permits your LPR to make decisions for you.
With a corporate trustee, ensure the company’s constitution appoints your LPR as replacement/successor director if not already a member.
It’s important to get things right from the outset so it doesn’t end in tears!.
*The information in this document (information) has been prepared by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks). The information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the information.