SMSF STRATEGY GUIDE
HOW CAN BENEFITS BE PAID & WHO ARE BENEFICIARIES
When it comes to estate planning in an SMSF, it isn't a case of anything goes. There are a number of specific rules regarding how benefits can be paid out, and who exactly can receive them directly from the SMSF.
HOW CAN DEATH BENEFITS BE PAID
SIS Reg 6.21(1) says that the member’s benefits must be ‘cashed’ as soon as practicable.
This requirement can be satisfied in three ways:
1. A lump sum - which can be done over a couple of instalments if required – allocated directly to the member's dependants from the fund – and we’ll get to the definition of 'dependants' shortly - , or;
2. An income stream can be paid to the member's dependants, although note that this has some limitations with regard to older children. Note that if the income stream was one that already existed and was initially created as a reversionary income stream, then this simply 'reverts' to the reversionary dependant beneficiary and continues on, or;
3. The member's account balance can be paid directly to their estate (via their personal legal representative) and then paid out according to their Will. Note that this has tax implications for any recipients who are not classed as a "death benefits dependant' under the Tax laws.
WHO IS DEFINED AS A DEPENDANT
So who is included in this definition of a dependant, and as such qualifies as someone who can receive a lump sum death benefit directly from an SMSF.
Under the SIS Act, a "dependant" includes a member's spouse (including a de facto), children of any age, and any person with whom they had an "interdependency relationship".
An interdependency relationship between two people includes:
(a) where 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.
This SIS definition is inclusive, but it is not exhaustive and therefore a commonly accepted inclusion in the definition is also any other person who was a financial dependant of the member – in other words, they relied on the member for financial support just before their death.
Remember, a SMSF can’t pay the member's benefits directly to a non dependent. The exception to this is where, after reasonable inquiry they cant find any of the member's dependants or their legal personal representative (i.e. the executor of their Will).
When it comes to death benefit pensions, the definitions are much the same as above, however they change a bit when it comes to children.
With children, instead of the dependent being a child of any age, a child can only receive a SMSF death benefits pension if:
The Child is under age 18, however the pension must stop before age 25. At age 25, the pension is commuted and paid out as a lump sum.
the Child is between age 18 and 25, and was financially dependant on you. At age 25, the pension is commuted and paid out as a lump sum, or
the Child is over the age of 18 and has a disability
CLICK HERE to go to the next article which outlines how death benefits are taxed, and introduces the concept of a 'death benefits dependant' for tax purposes.