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This article explains what happens when a member of a self-managed super fund passes away, and how the trustee is involved with distributing money to beneficiaries.

What happens when an SMSF member dies?

If someone who has a self managed super fund dies, the money in the fund will be passed to someone else. It can be distributed in a couple of ways.

The first option is what’s known as a ‘death benefit’. This is generally paid to a dependent or another beneficiary.

In the event that the recipient is a dependent such as a child or a spouse, the death benefit can be paid as either a:

  • Lump sum
  • Income stream

According to the Australian Tax Office, if the nominated recipient is not a dependent of the person who has passed away, the death benefit must be paid as a lump sum.

Ideally, the SMSF member will have signed a death benefit nomination, which will clearly nominate the person who should receive the funds.

If a beneficiary has not been nominated but there is a legal Will, the SMSF trustee may be able to transfer the funds to the deceased person’s estate. The Will executor will then distribute the money in accordance with the person’s wishes.

The other option is what’s known as a ‘reversionary pension’. Under this, the super pension of the person who has passed away will transfer to a nominated beneficiary, providing they are eligible. This means the beneficiary will start to receive an income in the form of superannuation payments.

What happens if there are no instructions in place?

If there is no binding nomination in place and a super fund member passes away, the trustee will have to use their discretion to decide where the money should be distributed.

In some instances, people who believe they are entitled to be beneficiaries of a superannuation fund may dispute the trustee’s decision. This can result in the trustee being overridden or losing their position.

The challenge this type of situation can present demonstrates the importance of installing an experienced trustee to oversee an SMSF. When you appoint someone who has prior understanding of the ins and outs of a self-managed super fund, they will make sure decisions are made and correctly documented when it comes to beneficiaries.

Why nominate a beneficiary?

People often assume the answer to who they wish to give their money to would be obvious, but this is rarely the case.

Consider the following scenarios:

  • A dispute arises between an adult child and the deceased person’s spouse
  • A former spouse believes they have a right to the money
  • One adult child feels they are entitled to more money than their sibling
  • The spouse of an adult child steps in and complicates the situation
  • An estranged relative shows up and makes a claim

Deciding who will receive the balance of superannuation and how it will be paid is an important step when establishing an SMSF. It’s also important to speak to an advisor about how to minimise tax involved with a super-related death benefit.

Get the right support for a positive SMSF experience

Having a well-managed SMSF fund and the support of an expert advisor makes so much sense. They will ensure the right decisions are made and that documents are signed, witnessed and stored so they are easy to access.

Our experienced advisors

  • Explain the requirements of the SMSF in detail
  • Help with ongoing management of the fund
  • Ensure the fund is compliant with regulations
  • Facilitate the smooth transfer of funds in the event of the death of a member

Need help to put in place a binding death benefit nomination or your estate plan, speak to Crest Lawyers today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.