SMSF trustees must be aware the only way they can change the form of any death benefits they receive from another member is to cash it out and remove it from the superannuation system, according to a technical expert.
Smarter SMSF chief executive Aaron Dunn said advisers and accountants providing advice to members receiving a death benefit should treat it as fixed and instead look at other strategies to assist the surviving member.
Dunn made the observation during a recent webinar when addressing the question of whether a surviving member can get out of receiving a death benefit if they have sufficient income from pension payments.
“When it’s a death benefit, the first thing to remember is that it is always treated as a death benefit,” he said during the webinar presented by legal firm Holley Nethercote.
“That means if the surviving member has made a decision, or there’s been a decision made by virtue of the reversionary status, the death benefit will be cashed as a death benefit income stream of which they are a tax dependent beneficiary.”
He added that where this created too much income from the pension and death benefits, changes could only be made inside superannuation to the assets linked to the surviving member.
“They could look to roll back their own benefit because they cannot roll back the death benefit income stream, which has become reversionary. This is an important nuance that people need to understand in the advice process,” he said.
He pointed out even if the fund was closed or the pension rolled back, the death benefit income stream would continue and the only way at this point to alter the nature of the death benefit would be to cash it out as a lump sum.
The death benefit pension must always continue and always remain tagged as a death benefit. Even if the money is rolled over to another fund, it must always be retained as an income stream there, otherwise it must leave the super system.
Dunn said being clear on this was an important issue for SMSFs with illiquid assets, such as property, where a simple treatment of a death benefit may not be possible.
“This is quite a simple example, but if you’ve got a fund that has multiple interests with different tax-free and taxable proportions in it, you do have more to consider about whether to leave money in super or whether you are trying to maintain pensions that have very high tax-free components in them,” he said.
“A good example in the SMSF space is where you might have heavy asset concentration and you cannot cash back a death benefit to a lump sum because you can’t sell half of an asset.
“In that instance you have to consider rolling back the member’s own benefit, otherwise you have to liquidate assets in the fund to pay that benefit out.”