Q&A with Tracey Norris: SMSF death benefits and trustee decision-making

That the trustee must act in accordance with the deceased member’s Will.  The overarching superannuation obligations and fund trust deed take precedence over the Will of the deceased member.  The Will can only determine the likely beneficiaries where the trustees have accepted a valid binding death benefit nomination that requires that the benefit be paid to the Legal Personal Representative for distribution under the Will.

This is where estates come unstuck, assuming the Will governs super can lead to payments going to unintended recipients and costly disputes.

Failing to plan for succession (including addressing illiquid assets) and not understanding the obligations under Superannuation Laws regarding replacement trustees and death benefit payments. In practice, this can create a disconnect between asset control and the intended beneficiaries, inhibit trustees' access to cash or force the sale of assets in circumstances that produce sub‑optimal results.

A reversionary beneficiary or death benefit pension can provide time to make a considered decision when grieving; and this allows for a transition of benefits to the survivor in an orderly manner, potentially retaining greater benefits within Superannuation into the future.

Small drafting errors can invalidate the nomination entirely, leaving trustees exposed and beneficiaries dissatisfied. There are numerous pitfalls and advice is critical to ensure that :

• the relevant fund can accept a binding nomination
• appropriate beneficiaries are selected - superannuation laws dictate possible beneficiaries and siblings, step-children, grandchildren and parents may not be permitted beneficiaries
• potential conflict is best avoided by ensuring intended beneficiaries can exert some control of super fund management to receive proceeds
• different beneficiaries have differing tax outcomes based on financial dependence.

Firstly, who is the intended beneficiary, then consider their eligibility to receive benefits under superannuation law, followed closely by tax outcomes and any alternate ways to satisfy the outcome in the most efficient way.  Overlaying this should be consideration of control of the SMSF post‑death, the liquidity of the SMSF to make payment, whether the beneficiary has options to receive the benefit via pension or only lump sum, the transfer balance cap position of the beneficiary if pension is preferred and whether retaining benefits in superannuation delivers a demonstrable long‑term advantage versus a lump‑sum payment.

Common issues include advising a lump sum may only be paid due to misunderstanding how death benefit pensions may interact with the survivor’s existing cap, not planning for forced commutations – often surfacing at the worst possible time and failing to proactively consider how excess balances unable to be converted to pensions will be paid—particularly where the fund holds illiquid assets.

Early planning is critical. Leaving it too late can force sub‑optimal sell‑downs or in‑specie transfers that don’t suit the beneficiaries.

Trustees should consider how benefits can be paid and how assets can be liquidated or transferred to meet benefit payments.  Or whether there is alternate plan such as introducing new members to provide additional liquidity to the SMSF to meet current and future obligations.

Division 296 has spooked many and some monies are already exiting the super system.  This will reduce the quantum of the balances that must be considered, but removing assets from SMSFs may impact the asset mix and liquidity of portfolios remaining within these funds.  Reviewing portfolios and ensuring they remain appropriate for members objectives and that SMSFs have the necessary liquidity following any restructure will be important in future death benefit management.  As will, ensuring that beneficiary entitlements have not been compromised by replacing super entitlements with personal assets.  Miss the alignment check and you can inadvertently disadvantage the intended beneficiaries. A review of Members’ Wills and BDBNs should be considered along with any proposed restructuring.

Family breakdowns, blended families, unequal involvement in family business matters and/or a lack of clarity in succession planning tend to create competing narratives about “intent,” which trustees/families then struggle to resolve objectively.

Members may hesitate to document their intentions during their lifetime due to fears of family conflict or perceived unfairness - silence today often becomes ambiguity tomorrow, which is the seed of disputes. Or as member’s age, potential beneficiaries may make requests for information that seem out of context, or they may seek to become unnecessarily involved in the financial affairs of others. Be alert to elder abuse or financial control.

Trustees must understand how superannuation law, fund rules, benefit payment agreements (ie pensions etc) and member instructions provide authority on the payment of a death benefit and ensure that they seek guidance from a SMSF specialist if they are uncertain on the process.  Once clear on the chain of authority and a decision is made, trustees must document their decision and communicate with intended beneficiaries and undertake the necessary reporting to the ATO.

What controls the outcome?  - Be clear on authoritative documentation – Law, Deeds (including chain of deeds), Pension agreements, member instructions (if any)

The Who - Who controls the trustee? Who are the beneficiaries and available modes of payment?

How will the benefit be paid?  - Consider investments and challenges in making payment