Caution should be used in withdrawing funds from an SMSF to pay for funeral expenses after the passing of a member as such actions may limit future death benefit withdrawal opportunities, a technical manager has noted.
Heffron head of SMSF technical and education services Lyn Formica said where an SMSF provides a binding death benefit nomination in favour of a legal personal representative acting as executor, that person should understand the specific issues in accessing monies from the fund for expenses.
“Where the confusion often comes in this particular situation is because of the way the banks approach things outside superannuation,” Formica said during a recent practitioner update.
“Most banks will allow funeral expenses to be paid from the deceased’s frozen bank account once the bank is given a copy of the death certificate and the funeral home’s invoice.
“In that situation, outside super, we don’t necessarily need probate. The bank will typically pay for the funeral expenses out of the deceased’s account.”
This situation differed where an executor was seeking to pay the funeral expenses by releasing money from the SMSF, with Formica highlighting such an act would be regarded as a normal death benefit.
“There is no allowance for the fact that it is funeral expenses they are paying for,” she added, noting such an act requires more scrutiny.
“Are we ready to pay a death benefit out of this fund? Are we certain the binding nomination is valid? Are we confident the purported executor is actually the executor and the will is not going to be found to be invalid?
“Even if we have all of that satisfied, the legislation talks about a two lump sum limit per beneficiary.
“If we’re going to pay a lump sum death benefit to the executor to cover the funeral expenses, then we’re using up one of those lump sums and only have one more left to pay out all of the remaining death benefits.
“If you can finance it outside super, it is probably easier to get those funeral expenses paid rather than bring forward a death benefit before you’re actually ready to pay it out.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason