Q: In a two member SMSF, where each is the declared beneficiary of the other and each has approximately 50 % of the assets in the fund, upon the death of one member, can the other member retain the funds in the SMSF or must they be paid out?
If they need to be paid out, is there a time limit to this? And what if the funds aren’t liquid e.g. property assets or term deposits?
A: Before getting into the nitty gritty of the questions, I should point out that in my response I’m going to assume “declared beneficiary” means that each has a Binding Death Benefit Nomination (BDBN) in favour of the other person. (Remember your Will has no impact on how benefits are paid out of your super fund.)
I’m also going to assume both members of the super fund are eligible to receive the other member’s death benefit. That is, they are deemed to be a dependant.
So can the death benefits be left in a super fund, or must they be paid out?
The simple fact is that something must be done with the member’s death benefit – it can’t remain in the fund indefinitely ‘unpaid’. They must be either paid as a lump sum or remain within the fund and be paid as a pension.
What happens with a member’s benefits very much depends on the terms of your fund’s trust deed and what any completed BDBN says.
If your SMSF has an old trust deed – because you haven’t regularly updated it – then it might only allow death benefits to be paid out as lump sums and may not permit a member to complete a BDBN.
However, don’t assume that a newer trust deed will automatically have these provisions.
The death benefit can’t stay in the super fund in the accumulation phase and can’t be added to the surviving member’s existing accumulation phase benefit. However, benefits may be able to stay in the fund if they are being used to pay a pension. Over time, they will cease to be the deceased member’s assets and become the remaining member’s super fund assets.
Is there a time limit on lump sum death benefits?
Before answering this question, I need to mention that trustees have to act in the best interests of the beneficiaries at all times and to the exclusion of all personal considerations.
If the terms of the trust deed are quite clear and there is no dispute as to who will receive these benefits and how they will be paid, then there is no justification for any delay in payment. Most of us wouldn’t accept any delay from a retail super fund and the same principle applies for SMSFs.
Problems paying a death benefit promptly due to liquidity
All super fund trustees have to establish an investment strategy and the super legislation demands that in framing this strategy, trustees have to consider their fund’s liquidity requirements including expected cash flow needs.
If an SMSF trust heavily invested into illiquid assets, which cause a delay in the payment of death benefits, has the trustee adequately taken into account their fund’s likely cash flow requirements? Have they acted in the best interests of all their beneficiaries?
We don’t know enough about this case to answer definitively, but my hunch is no to both questions.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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- Geoff Wilson: A stock to buy in uncertain times [2]
- James Dunn: Two simple ways to beat the market [3]
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- Andrew Bloore: Is your boss paying you the right super? [5]