Q. I had always assumed that on the death of one person of a 2-person SMSF that if the second person is to inherit (by virtue of a binding death nomination or decision of trustees) that that person would simply take ownership of the shares etc within the confines of the SMSF. I have now been advised that death is a trigger to a mandatory payout of the Super fund members account to the beneficiary. That would mean the assets would be removed from the SMSF. If you are in pension mode and 70+ and not working is there any way of getting them back under the umbrella of the SMSF?
A. It depends on what you as Trustees of your fund are compelled to do under the Binding Nomination and what you are permitted to do according to the rules of your SMSF and the law.
Your SMSF Trust Deed is the “rule book” for the fund. The Deed needs to adhere to the SIS Act which is the law applicable to Superannuation. The ATO enforces these laws. You need to ensure that there is no conflict between your Death Benefit Nominations, the SMSF Trust Deed and the SIS Act. The ATO imposes heavy penalties for Trustees that are in breach of either the Trust Deed or the SIS Act. All SMSF documents need to be kept up to date and appropriate to your circumstances.
When a member within a SMSF passes away, the Trustee is compelled under the law to follow the instructions of the Binding Death Benefit Nomination. However the beneficiary usually can nominate to receive the benefit as a Lump Sum or a Reversionary Pension. Therefore assets do not necessarily need to be sold and could remain within the SMSF if a Reversionary Pension is elected.
You need to ensure that the Binding nomination provides the Trustee with the flexibility to provide a Reversionary Pension to the beneficiary and that it does not dictate the form that a benefit must be paid. Additionally the Trust Deed must also permit this to occur. In the absence of this, the Trustee will have no choice other than to liquidate the assets of the fund required to pay out the members account from the SMSF.
It is important to ensure that any Death Benefit nominations, whether binding or non-binding, are appropriate and validly made and that control of the fund passes to the appropriate person(s) to ensure the deceased member’s wishes and beneficiaries future needs are met.
The above Q&A was originally published in The Australian