When all SMSF members die – individual trustees

SMSF technical expert and columnist for The Australian newspaper
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Two weeks ago, I wrote about the control of an SMSF with a corporate trustee when all members die at the same time.

I’m now going to look at this issue when individual trustees run an SMSF, as control is worked out very differently.

For an SMSF with corporate trustees, the terms of the company’s constitution are critical. Also The Corporations Act – and some of the default provisions that are found in there – are also sometimes very handy. For corporate trustees, the fund’s trust deed is important but in most cases takes a back seat until the issue of who can be appointed directors of the trustee company are sorted out.

But what happens when all members of an SMSF with individual trustees die at the same time?

Key documents

It’s still essential to confirm that death has actually taken place and then key documents need to be located.

The key documents aren’t the various super or tax laws. The key documents are the fund’s trust deed and the Trustee Act in the State or Territory in which the fund is based.

Let’s assume we have a fund with two members.

When it’s unclear which member died first, it’s assumed that the older member died first. At this point, we need to tell the ATO that the deceased trustees no longer fulfil this function because of their death (there is an ATO form for this). The ATO will want to know who now controls the fund. The initial response has to be that this is being sorted out according to the fund’s trust deed.

Legal personal representative

We need to examine the fund’s trust deed to see if the deceased’s Legal Personal Representative (LPR) is automatically appointed as a director.

If this is the case, then we need to make sure the LPR can actually be appointed as a trustee. In effect, this means we need to confirm that the LPR isn’t disqualified from being an SMSF trustee for some reason, for example, an undischarged bankrupt.

Once the LPR has been appointed by the court after probate has been granted, or Letters of Administration have been issued, then they can be appointed as an SMSF trustee. This appointment needs to occur according to the rules of the fund and the LPR would sign the ATO trustee declaration. The ATO need to be informed about the appointment.

If the LPR isn’t automatically appointed, then we can ignore these requirements./wp-content/images/3.4.14-Consensus-and-Share-Target-Chart.jpgDeath benefits guardian (DBG)

Some SMSF trust deeds allow a DBG to be appointed. Some of the powers given to DBGs can be:

  • Consent or veto to how death benefits will be distributed;
  • Remove trustees;
  • Consent to trust deed amendments.

Obviously, you’ll want to carefully review your fund’s trust deed to work out if this applies to you.

I’m not a great fan of DBGs but I will deal with this in another article.

Who appoints replacement trustees?

In the absence of the automatic appointment of a deceased’s LPR as a trustee, we need to see if the trust deed confers a power to appoint a replacement trustee. In many cases, this power is given to the existing surviving trustees. However, as all fund members are dead, this provision doesn’t help us in this case.

It may be that this power is given to the LPR of the last surviving trustee – in our case, the younger member.

At this point, reference could be made to your SMSF’s State or Territory Trustee Act. For example, the NSW Trustee Act gives the LPR of the last surviving trustee a statutory power to appoint a replacement trustee.

This legislation also allows a court to appoint a replacement trustee. Clearly, this might be a safer option if managing the deceased’s affairs are controversial and you want to avoid future hassles.

Fund assets

For SMSFs with individual trustees, all fund assets have to be in the name of all trustees.

What happens now that all trustees are dead? Who controls the assets?

There are three potential issues here:

  • Owned as joint tenants – ownership transfers to the younger trustee automatically; this means the younger trustee’s LPR controls and owns the fund’s assets; their job is to protect the fund’s asset and, in time, transfer ownership of the asset when the fund’s replacement trustees are appointed.
  • Owned as tenants in common – each trustee’s interest transfers to their respective LPR; these LPRs jobs are to protect and, in time, transfer ownership of the asset when the fund’s replacement trustees are appointed.
  • Solely by one trustee and not the other (that is, incorrectly) – these assets are transferred to the deceased trustee’s LPR, whose job is to protect and transfer the asset at the appropriate time.

When the LPR doesn’t become a trustee

It’s important to realise that a deceased’s LPR doesn’t automatically become a trustee of an SMSF. This is a very common misconception, as the super laws allow for this but don’t mandate this rule.

As noted above, they can become a trustee but this happens because of a specific provision in a fund’s trust deed.

If the LPR isn’t a trustee, then they can’t exercise any SMSF trustee powers and have no rights under the trust deed.

Once the replacement trustee has been appointed

These requirements are very similar to those for a corporate trustee. They are:

  • Value assets to determine the size of the death benefit;
  • Claim any death insurance proceeds;
  • Determine if any anti-detriment death benefit augmentation (that is, return of contributions tax) can be made;
  • Determine any succession rule applying to the benefit (for example, if a pension is to be paid, then will another person receive that benefit if the initial pensioner dies?).

Conclusion

I have long been an advocate for corporate trustees for SMSFs. Comparing what happens in multi-member SMSFs when all members die adds further weight to my argument.

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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