Newsletter No. 10, October 2014

What happens to a two-member fund if one member dies?

According to the statistics published by the Australian Taxation Office (ATO), 69% of SMSFs in Australia have two members.  A question that I am often asked is what happens if one member dies or the main decision maker is diagnosed with a terminal illness or suffers a major health problem?

SMSF structure:  Under the superannuation law, if an SMSF is established with two individual trustees and one dies, it becomes a single member SMSF.  The rule for a single member SMSF is that if it is established under an individual trustees’ structure, then it must have two individuals acting as trustees.  If it is established under a corporate trustee structure, it does not matter that the surviving member continues to act as the sole director of the company acting as the corporate trustee.

So, under an individual trustees’ structure, if one of the member’s dies, in order for the superannuation fund to continue as an SMSF, the surviving member will need to consider either appointing someone else to act as the second individual trustee or restructure the SMSF from an individual trustees’ structure to a corporate trustee structure where the surviving member acts as the sole director of the company acting as the corporate trustee.

If the member who is the main decision-maker is no longer able to perform trustee duties for their SMSF, then this person will need to step down as a trustee after appointing the other member, a family member or a friend, to be their legal personal representative and act as trustee. This can be achieved by giving them an enduring power of attorney.  Another option is to consider winding up the SMSF by rolling money into a retail superannuation fund regulated by the Australian Prudential Regulation Authority (APRA).

Assets of the SMSF:  Under the superannuation law, the only situation where an SMSF must pay out a superannuation benefit is when an SMSF member dies.  The death benefit must be paid out as soon as practicable after the member has died. The term “as soon as practicable” is not defined and the ATO has not published any guidelines on this.  In my opinion, if the death benefit is paid promptly following the member’s death (e.g. within 6 months) after liquidating assets, it will be acceptable to the ATO.  If there are reasonable delays that can be explained to the ATO, the ATO may accept the actions of the surviving member.

What happens if the SMSF has the majority of its assets in properties or assets that cannot be liquidated easily? The SMSF could consider making an in-specie payment. Superannuation benefits can be made in-specie.  An in-specie benefit is where an asset is transferred to the member as a benefit instead of paying the benefit using cash.  However, an in-specie payment cannot be made where the payment relates to benefits for reasons of financial hardship, compassionate grounds or a departing superannuation payment made to a non-resident member.

Winding up the SMSF:  There are a number of things that must be considered before winding up an SMSF. This includes rolling superannuation entitlements of members to an APRA regulated superannuation fund.  Some superannuation funds will allow assets such as listed shares to be transferred to them whereas others will only allow cash. This means you would need to sell the assets of the SMSF and then rollover the cash proceeds.  Of course by selling assets in your SMSF, if your SMSF is in an accumulation phrase, it may trigger capital gains tax payable on the sale of the assets.    If your SMSF is in pension phase then it will not have to pay capital gains tax on any sale of assets supporting the pension.

Changing assets in an SMSF:  If assets in an SMSF need to be changed to simplify the management of the SMSF, due to the death or incapacity of the main decision-maker, then you must ensure that any new assets added to the SMSF are in line with the SMSF’s existing investment strategy.  If not, you should consider updating the investment strategy.

Do not be alarmed if you are left managing your SMSF on your own.  There are SMSF professionals, like myself, out there who can assist you with your decisions.

Disclaimer

Monica Rule worked for the ATO for 28 years and is a Self-Managed Superannuation Specialist Advisor. Monica is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” www.monicarule.com.au. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions.