One of our readers, a widow, has asked some great questions about her super fund.

She is the sole member of her fund and at the moment, the two individual trustees of this super fund are herself and her sister. She has two younger adult children who currently have no involvement with the fund.

She wants to know about the trusteeship of her super fund, especially individual versus a corporate trustee, as she has been advised to replace her sister with a corporate trustee.

She also wants to ensure each child receives 50% of any money in the super fund if she were to die. Alternatively, she speculated that maybe “it might be wise to sell shares over a time frame rather than on death”.

Individual versus corporate trustees

As noted our reader has two individual trustees in her super fund – herself and her sister. Under the super laws, a sole member SMSF that doesn’t have a corporate trustee must have two individual trustees – one of those trustees must be the member and the other must be a relative of that member or someone who doesn’t employ the member.

Obviously our reader’s sister is her relative so all appears to be in order there.

In relation to corporate trustees, I’m a big fan. The major reasons I prefer a corporation is that they are simpler and will almost certainly be cheaper for most people.

One advantage of this structure for sole member funds is that you can have a sole director company with the SMSF member as that director. This removes the need to have another trustee.

A small tip – once the company is in place, consider paying the ASIC fee 10 years in advance because they give you a good discount on the normal annual fee and it removes the need to pay another bill every year.

However the steps in moving from individual to corporate trustees can be a bit painful and sometimes you can incur some costs. Hopefully, your fund’s administrator can provide guidance and assistance and will also let you know their costs. You can also follow the steps here.

If you own shares then your broker or share registry will want to charge a fee on changing the trustee. If your fund owns any real estate then a lawyer will have to organise changing the property’s title and have that stamped.

Death benefit payments

I’ll assume our reader will be receiving a pension from their SMSF when they die. I’ll also assume that her daughters are no longer dependent on her.

When that pension commenced, the taxable and tax-free components – expressed as percentages – will have been determined and these never change for the life of that pension.

When a super fund member dies, the fund is given a period of time to pay a death benefit out and any capital gains on the assets aren’t taxed because a pension was being paid at the time of death.

The tax-free portion of the death benefit is always paid out tax free.

The taxable portion is taxed at 15% plus the Medicare Levy if it’s paid to non-dependants (that is, our reader’s daughters).

A handy way of dealing with this issue is to sell super fund assets tax-free and take lump sums out before death and hold these assets in your own name and distribute via your Will or pay it to beneficiaries before death.

So we need to know the taxable/tax-free split of the pension and the amount of capital gains in the pension’s assets to work out the best way forward here.

We also need to make some assumptions about how much CGT might be paid if the assets are taken out of super and held personally prior to death.

The next issue is how to ensure her children receive 50% of the super money each on her death and arguments or controversies are avoided.

A good starting point is a Binding Death Benefit Nomination, which nominates your beneficiaries and the percentage of the benefit they’re entitled to receive.
But the main issue is who controls the fund? The answer to this depends on the type of trustee your super fund has.

With individual trustees, it’s the surviving trustee.

With a single director corporate trustee it will depend on who has an ability to appoint a director (this will be in the corporation’s constitution). It might be your legal personal representative – that is your executor.

An important question is who will inherit your company shares as the shareholders might have the ability to meet and appoint replacement director(s)?

If our reader gave the shares in the trustee company equally to her children and, assuming they have a good relationship, then they can organise the appointment of replacement director(s), the sale of any assets in the super fund and the equal distribution of the super fund’s assets to each other.

All sounds so simple … assuming her surviving children get along!

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.