Estate Planning and your SMSF

What Happens to my Super When I Die?

With the Simpler Super Laws having come into operation on 1 July 2007, there have been significant changes in how the account balance of the member is paid out of a Self Managed Super Fund when they die. This payment is known as a “death benefit”.

The way your SMSF ‘Death Benefits’ are paid depends upon:

The Trust Deed of the Super Fund you were a Member of,
The Superannuation laws that set out who can get your “Death Benefits”,
If you have left a written direction as to whom and how the Death Benefits will be paid.

You need to look at who can be paid your Death Benefits and how they can be paid. This will determine what and if any tax will be paid at the time.

You SMSF Account Balances at the time of your death are made up of 3 different types of benefits:

Tax-Free Component: these are usually savings paid to the Fund during your lifetime where no tax deduction is claimed. These are called “non-concessional contributions”. These are referred to as the “tax-free component” of your Account Balance. Money paid through the Small Business Capital Gains Tax concessions are also tax-free component of your Account Balance.
Taxable Component (taxed element): these are the contributions you have made during your life when a tax deduction was claimed for these contributions. These are called “concessional contributions” or the “taxable component” of your Account Balance.
Taxable Component (untaxed element): these are the amounts of your Account Balance where no tax has been paid. The best example is life insurance proceeds.

Who can receive my Super Fund Death Benefits?

The following individuals are considered ‘tax dependants’ and can receive the payment of a super fund death benefit in the form or lump sum, pension or combination of both:

My spouse,
My defacto partner;
Any of my children who are under age 18 and still at school;
Someone who I have an “interdependent relationship” with and for this to apply all of the following conditions must be proved:
- I must have had a close personal relationship with them,
- We must have lived together,
- Each of us provided the other with financial support; and
- Each of us provided the other with domestic support and personal care.
Anyone who was financially dependant upon me at the time of my death. They would have to prove this.
It must be noted that if you have a disabled child regardless of how old they are they will always be a dependant to qualify to be paid any death benefit.

Where a SMSF Lump Sum death benefit is paid to any of the above individuals, no tax is paid on this lump sum regardless of the amount or type of components within the deceased member’s account balance. For a pension benefit,

How can my Death Benefits be paid to a “tax dependant”?

Your SMSF death benefits can be paid to a ‘tax dependant’ in one of two ways:

As a lump sum: all of your superannuation Death Benefits can be paid lump sum tax free (regardless of the components within the deceased member’s account balance); and
As a income stream (or pension): the assessability of the pension is subject to both the deceased member’s age and the age of the tax dependant at the time the benefit is paid.. If this is being paid to a child tax dependant that child must be under age 25 and be a “tax dependant” at the time.

If an adult child receives a pension it must be cashed to a tax free lump sum amount when they turn age 25.

There are a few “tricks” with Pension Payments from a deceased superannuant’s death benefits. It all depends on how old the person was when they died as to whether any tax will be paid on the Death Benefits Pension payments.

If the deceased member was under age 60 when the passed away and the beneficiary receiving the pension is less than age 60, they will:

pay no tax on the part of the pension made up of tax-free component;
be assessed on the taxable component of the pension at their marginal tax rate; and
receive a 15% tax offset on the assessable pension amount (made up of taxable component).

Once the person being paid the pension is age 60 or over, both the taxable and tax-free components are not assessable (tax-free). Where the deceased member was 60 of over when they died, this pension is tax-free regardless of the age of the beneficiary.

What if I don’t have any tax dependants? What happens to my SMSF death benefits?

The Trustee of your Fund can pay your death benefits to “non-tax dependents”. These are adult children who cannot claim to be your tax dependant. They are financially independent earning their own income living independent lives.

You cannot pay a pension to non-tax dependants. Your death benefits must be only paid to them as a lump sum.

The tax consequences of these lump sum payments paid directly to non-tax dependants are:

Tax-free component – 0%
Taxable component – taxed element – 16.5%; and
Taxable component – untaxed element – 31.5%

Instead of paying your death benefits direct to your non-tax dependant children from the Fund it can be paid via your Estate. You can elect to have your Death Benefits paid to the Executor of your Will. This person is known as your “Legal Personal Representative”.

What if I don’t have any children to pay my Death Benefits to when I die? What happens to my Self Managed Super Fund?

Your Legal Personal Representative can, as the Executor of your Will and Trustee of your Estate, be paid your superannuation Death Benefits. If this was done you must make provision in your Will as to who will be paid the benefits.

The tax consequences of paying your Death Benefits through your estate is exactly the same as when paying the benefits to your non tax dependant children except tax of is payable on the non taxed component.

Need more information about Estate Planning and your Self Managed Super Fund?

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SMSF – Money when you are gone – death benefits