When a self-managed super fund (SMSF) member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. This should be done as soon as possible after the member’s death.
If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream. The income stream can be new or a continuation of an existing income stream.
If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.
Dependants
A person is a dependant of a deceased member if, at the time of death, that person was:
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- the deceased’s spouse, and
- a child of the deceased – this includes a child less than 18 years old or a child that was financially dependent on the deceased and less than 25 years old or the child has a disability,
- in an interdependency relationship with the deceased – this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.
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Also included in the definition of a death benefit dependant is someone receiving a super lump sum because the deceased died in the line of duty as a:
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- member of the defence force,
- the Australian Federal Police,
- the police force of a state or territory,
- a protective service officer,
- or they are the deceased member’s former spouse or de facto spouse.
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Who to pay the death benefit to?
The SMSF member may have made a death benefit nomination asking the SMSF trustees to pay their death benefit to their nominated beneficiaries.
The nomination may be binding or non-binding. While having regard to the member’s nomination, the SMSF trustees must ensure the nominated beneficiaries are entitled to receive death benefits under the trust deed and super law.
If the deceased member did not nominate a beneficiary, the trustee may pay it to the deceased’s estate for the executor to distribute it according to the instructions in their will.
Super death benefits – Calculating tax on super death benefits
If the death benefit is paid as a lump sum to a dependant of the deceased, it’s tax free. It’s not assessable income or exempt income. The SMSF doesn’t withhold tax from the payment and the recipient doesn’t include it in their income tax return.
If the death benefit is paid as an income stream, or is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay. Your SMSF will need to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and, if appropriate, withhold tax from payments.
Note – if the fund has limited cash available, assets may need to be sold to pay the benefits.
What is a Binding Death Nomination?
SMSF members can nominate who will get their benefits when they die.
A binding death benefit nomination directs the trustee to pay the benefit to a legal personal representative or a dependant.
Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the trust deed and super laws.
The trust deed must be followed, even if it is different to the member’s will.
In Summary
It’s wise to plan ahead when dealing with a SMSF death of a member. If there is a dispute over the payment of death benefits which can’t be resolved, it may lead to costly court action or unnecessary taxes.
A SMSF professional can help you get it right – for you & your beneficiaries. Talk to us today!