Many Australians have significant wealth in their self-managed superannuation funds (SMSFs). Accordingly, it is vital to properly plan for what will happen to their SMSFs upon loss of capacity and death. There are several key steps in this process, such as identifying the governing rules of the SMSF and ensuring enduring powers of attorney are in place. WILLS DO NOT GOVERN SUPER UPON DEATH A Will does not govern how superannuation is to be dealt with upon the death of a member. Consider John Citizen who has $1 million in a superannuation fund. His Will may well stipulate that his superannuation death benefits must be paid directly from the fund to his spouse. However, a provision in his Will to this effect would typically have no effect, because superannuation death benefits do not form part of the types of assets that are governed by Wills. The Commissioner of Taxation states that “payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the superannuation fund and not in accordance with the terms of the deceased’s Will” (SMSFD 2008/3 [5]). Nevertheless, preparation of a Will is still a vital step in planning for SMSFs upon death. There are two key reasons for this: Reason 1 – in case benefits are paid to the legal personal representative. Generally, superannuation death benefits may only be paid to either dependants of the deceased or the deceased’s legal personal representative. If they are paid to the legal personal representative, then they will be subject to the terms of the Will. Reason 2 – nomination of legal personal representative.
A Will nominates the person (or people) who will be the executor of the deceased’s estate. The executor is the legal personal representative of the deceased. The legal personal representative often plays an important role in the running of the SMSF upon a member’s death. Therefore, the Will is important because it identifies who the legal personal representative will be. BECOMING AN SMSF TRUSTEE There is an important misconception that must be addressed at this stage. Many people think that the legal personal representative of a deceased person automatically becomes a trustee (or a director of a corporate trustee) of an SMSF upon a member’s death. This is incorrect. The legal personal representative of a member does not automatically become the trustee of an SMSF upon death of the trustee.
Similarly, the legal personal representative does not automatically become the director of a corporate trustee when the member dies. Instead, the legal personal representative must be appointed as trustee (or director of the corporate trustee). The relevant legislative provision is s 17A(3)(i) of the SIS Act. Many people incorrectly think that s 17A(3)(a)(i) provides that a legal personal representative automatically becomes a trustee/director upon a member’s death. However, s 17A(3)(a)(i) actually provides something a bit different. It says that if the legal personal representative does become a trustee/director when a member dies, the fund merely does not cease being an SMSF. WHY DOES THE IDENTITY MATTER?
There are several ways in which the legal personal representative of a member might play an important role in the running of the SMSF upon the member’s death. This is the case for both SMSFs with individual trustees and corporate trustees. Consider an SMSF that has a corporate trustee. In this case, the member will typically hold shares in the trustee company. Upon the member’s death, their legal personal representative might get control of the shares. Thus the legal personal representative could vote himself or herself in as a director of the corporate trustee. In this way they would have significant control over how the member’s death benefits are to be paid. A similar situation arises with an SMSF that has individual trustees. The governing rules of the SMSF might provide that upon a member’s death, the member’s legal personal representative can vote in a new trustee.
