SMSF Technical Education & Strategies

 

Who can receive your SMSF death benefits & in what form ?

When thinking about how you are going to disburse your SMSF death benefits, you need to understand the rules around who can receive benefits, and your choices in terms of the form in which they can be paid.

 

How and to whom can they be paid ?

When a member of a SMSF dies, SIS Reg 6.21(1) states that the member’s benefits must be ‘cashed’ as soon as practicable.

 

There are basically only three ways to satisfy this requirement:

 

1. A lump sum (or done over two installments) paid directly to your dependants from the fund (see definition of 'dependants' below), or;

 

2. An income stream paid to your dependants, subject to some limitations with regard to children (see the table below for these). Note that an existing income stream that was created as a reversionary income stream simply 'reverts' to the stated dependant beneficiary and continues on, or;

 

3. A lump sum paid directly to your estate (personal legal representative) and disbursed via your Will to whomever you like, subject to tax implications for those not classed as a "death benefits dependant' under the Tax Act.

 

So who is a dependant ?

A "dependant" is defined under the SIS Act as including your spouse (includes de facto), any of your children, and any person with whom you had an "interdependency relationship".

 

An interdependency relationship between two people is where:

(a)  they have a close personal relationship; and
(b)  they live together; and
(c)  one or each of them provides the other with financial support; and
(d)  one or each of them provides the other with domestic support and personal care.

 

Note that if two persons satisfy the requirement of (a); but they do not satisfy the other requirements because either or both of them suffer from a physical, intellectual or psychiatric disability, then they are still classed as having an interdependency relationship. Further, two persons will not have an interdependency relationship if one of them provides domestic support and personal care to the other under an employment contract or a contract for services or on behalf of another organisation such as a government body.

 

Note also that the SIS definition is inclusive, but not exhaustive and as such a commonly accepted inclusion in the definition of dependant for SIS purposes is also any other person who was a financial dependant of you (i.e. relied on you for financial maintenance) just before you died.

 

A super fund cannot pay money out directly to a non dependent unless after reasonable inquiry they cannot find a legal personal representative (normally the executor of your Will) or any dependants.

 

The table below provides a summary of who can be paid a death benefit directly from the SMSF, and in what form:

 

Benefit payable	Beneficiary
Lump Sum	- Spouse - Children - Person with 'interdependency relationship' - Financial dependant - Pay directly to legal estate and is then paid out according to your Will. Anyone can then receive a benefit from your Will, however there are tax consequences for those not classed as a "death benefits dependant' under the Tax Act.
Pension	- Spouse - Child under age 18, however the pension must cease before age 25. At age 25, it must be commuted and paid out as a lump sum. - Child between age 18 and 25, who is financially dependant on you. At age 25, it must be commuted and paid out as a lump sum. - Child over the age of 18 who has a disability of the kind described in subsection 8 (1) of the Disability Services Act 1986. - Person with 'interdependency relationship' - Financial dependant

 

Now the next step is to understand the tax consequences of death benefits in each form, and in the hands of different beneficiaries.

 

A key concept here is the fact that 'dependants' can receive lump sum payout's tax free, however the Tax Act has its own definition of what is a 'dependant' and its slightly different to that of the SIS Act.

 

See our next article on the tax consequences of SMSF death benefits.