The cashing out of death benefits does not have to be executed using physical cash and can be completed via an in-specie transfer of an asset, a technical services manager has said.
Speaking at the Self-managed Independent Superannuation Funds Association SMSF Virtual Forum 2020 today, Heffron head of SMSF technical and education services Lyn Formica noted cash is only required when pension payments have to be made upon the death of a member.
“Death benefits need to be cashed [and] that cash terminology [means] we’re talking about paying it as a lump sum or dealing with it in the form of a pension. It doesn’t mean we physically have to use cash to pay out the lump sum,” Formica said.
“Provided we’ve got a trust deed that allows for it, then we can do an in-specie commutation, so a transfer of an asset instead.”
She suggested this form of death benefits cashing would be useful for SMSFs with illiquid assets.
In addition, she noted the use of an in-specie transfer could allow a death benefit payment to be drawn from different segments of the SMSF, that is, some of the payment could be drawn from the deceased member’s accumulation balance and some of the payment could be a partial pension commutation.
In-specie transfers can also be of use when the surviving member wished for some of the death benefit to be allocated to an adult child and to this end could save unwanted additional transactions and associated costs, she said.
She illustrated the point with an example where the deceased member had an accumulation account balance of $400,000 and a pension worth $1 million in an SMSF holding a property valued at $1 million.
According to Formica, if the surviving spouse wanted to take a death benefit payment of $1 million partially from the deceased member’s accumulation account and partially from their existing pension, they could do so using an in-specie transfer of the property.
Further, if the surviving member wanted the property to be passed on to an adult child, they could request the in-specie transfer go directly to the adult child.
“Why [would they] do that? [It] would avoid doing multiple [asset] transfers and hopefully [avoid being charged] double stamp duty,” she noted.