Compared to fifty or more years ago, most of us have lives of extraordinary affluence and overall good health. We increasingly seem completely safe and almost risk free.
The Malaysian Airlines tragedy reminds us that, despite our best endeavours, we live in a dangerous world where the unexpected does happen. Vehicular accidents – thankfully in decreasing numbers – continue to cause harm and damage lives.
The three critical issues to consider when an SMSF member dies are: who controls the fund?; what is the succession rule applying to the death benefit?; and what powers are available to determine how a death benefit is paid?
But what happens when all members die at once? A Switzer Super Report member last week asked what happens to his two-member SMSF (with a corporate trustee) if both members died at the same time.
Multi-member corporate trustee SMSFs
When all members of an SMSF with a corporate trustee die, then the corporate entity survives the death of the directors (for individual trustees, the older trustee will be assumed to have died first).
On the death of a member, the first issue is to determine what constitutes a quorum for a director’s meeting. This will be contained in the company’s constitution. This may be necessary if the surviving directors (if any) can meet and appoint another director.
Next you need to work out if there are any automatic director appointment provisions in the trustee company’s constitution and similar provisions in the fund’s trust deed. These provisions aren’t common in off the shelf documents.
If a deceased’s Legal Personal Representative or LPR – typically their executor – is automatically appointed, then this can’t take place until the probate or letters of administration have been issued for the deceased estate.
If a person other than the LPR is specifically nominated as the replacement trustee, then the appointment doesn’t have to wait for probate or letters of administration to be issued.
Note that if someone is appointed as a director at this stage, then the person must accept their appointment under the Super and Corporations laws and must not be disqualified under either of those laws. Upon appointment, the Tax Office and ASIC both need to be notified.
If automatic director appointments aren’t a feature of your company’s constitution, then who are the shareholders of the corporation? There are several issues here:
- The deceased were shareholders – the deceased’s LPR will exercise the voting rights to appoint replacement directors (clearly this will be delayed until the LPR has been appointed) and using these voting rights could appoint themselves.
- The deceased weren’t shareholders – then the shareholders can appoint the replacement directors.
The role of replacement trustees
The replacement trustees will need to:
- 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?).
Need to know
And finally, in order to remain an SMSF, a fund must satisfy the trustee definition within six months of falling outside the various SMSF rules. This is a hard-and-fast rule and the regulators don’t have flexibility to extend this time. If a fund ceases to be an SMSF, then it automatically is regulated by APRA. How do you pay out benefits from a fund where it takes more than six months for an LPR to be appointed, who is then the replacement trustee? At the very least, you would need to speak to the ATO about how best to handle this situation.
Multi-member SMSF with individual trustees
A number of other issues need to be considered here and I’ll deal with these in a future column.
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.
Also in the Switzer Super Report:
- Roger Montgomery – Carsales has plenty of potential [1]
- Charlie Aitken – Still banking on Queensland [2]
- Staff Reporter – Buy, Sell, Hold – what the brokers say [3]
- Fundie’s Favourite – Domino’s delivers for shareholders [4]
- Penny Pryor – Short ‘n’ Sweet – the mining giants [5]
- Questions of the week – Worley Parsons and BHP – buy, sell or hold? [6]