Death benefits from an SMSF
Who can receive my benefits when I die?
Death benefits must be paid to your surviving spouse, children, dependants or legal personal representative to be distributed via your will. Dependants means spouses, including de facto and same sex partners, children of any age and people in an interdependency relationship with you.
An interdependency relationship is where you have a close personal relationship with another person who you lived with and provided or received financial support, domestic support and personal care.
On your death you may wish to have a pension paid to your surviving spouse or dependant for tax purposes. A dependant for tax purposes excludes your child who is at least 18 years old. You may also have your super benefit paid to your spouse, any of your children, other dependants or to your legal personal representative of your estate as a lump sum.
When paying a pension or lump sum to any person other than your legal personal representative, the trustee must deduct the appropriate tax, if any, from the benefit.
Can I nominate who will get my benefits when I die?
You can nominate who will receive your death benefits by making a binding or non-binding death benefit nomination. The trustee must follow your instructions in a binding death benefit nomination or can consider your wishes, but do not need to follow them exactly, if it is a non-binding death benefit nomination.
A binding death benefit nomination gives you certainty over who will receive your death benefit. Your nomination can be lapsing, usually after three years, or it can be a non-lapsing nomination. If the nomination has lapsed the trustees of your SMSF will need to follow the SMSF’s trust deed to work out who is to receive the benefit which may differ from what you’ve intended.
If the nomination you make is not binding the trustees must have considered all potential beneficiaries not just those in the nomination. It can mean your intentions may not be followed by the trustee.
Under both types of nominations, you can direct the trustee that your death benefit is paid as a pension or lump sum to your dependants. If you have directed your death benefit to your estate or to your adult children, it can only be paid as a lump sum. However, you may leave the type of benefit to be paid to the option of the trustees or your beneficiaries.
Can death benefits be paid as an income stream or lump sum?
Your death benefits may be paid as a pension or lump sum to your nominated beneficiaries. However, if the beneficiary is your legal personal representative or an adult child your death benefit can be paid as a lump sum only.
The SMSF may be liable to any potential capital gains tax arising because of the sale of investments to pay a lump sum death benefit. If a death benefit income stream is being paid the tax exemption will apply to any income or capital gains that are supporting the income stream assets.