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When a member dies, there is a lot to deal with in the aftermath – including the member’s SMSF.
What Happens When a Member Dies
In an SMSF when a member dies, the trustee needs to deal with the deceased member’s pension assets. How this works, depends on many factors such as the nature of the assets, whether the assets are segregated, and a range of other things.
But one important factor is whether the deceased member is in pension mode at the time of death and whether that pension is a reversionary pension or not.
In this episode, Meg Heffron of Heffron SMSF Solutions will walk you through the details. Here is what we took away from this interview, but please listen in since Meg explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
When a Member Dies
Here are six things we learned about what happens when a member dies:
1) When a member dies, anything that is not a reversionary pension is a death benefit.
2) A death benefit can’t move into the receiving member’s accumulation account. It either needs to be cashed out or moved into a pension. You can’t leave a death benefit in super unless it is in pension.
3) A reversionary pension will hit the receiving member’s total superannuation balance (‘TSB’) straight away upon death.
4) A reversionary pension doesn’t hit the receiving member’s transfer balance account (‘TBA’) until 12 months after death.
5) Non-reversionary pensions as well as accumulation accounts result in a death benefit. And a death benefit can be cashed out or moved into a pension. If the latter, then it will hit both the TSB and TBA as soon as the pension starts.
6) The TSB is assessed by the 30th of June of the previous year so for the remaining rest of the current year it doesn’t matter that the TSB has now been hit by the inheritance. It will only affect non-concessional contributions in the financial year following the year the member died.
Example
Here is the example Meg Heffron goes through in the interview.
30 June 2018
It is the 30 June 2018 and life is great.
John and Jane are self-funded retirees and receive a pension from their SMSF – account-based pensions (‘ABP’). They made both pensions reversionary to each other.
Jane has an ABP of $1.2m and used up $1.2m of her transfer balance cap (TBC). John has an ABP of $1.6m and has hit his TBC. He also has $0.4m in accumulation.
So together John and Jane have $2.8m in the retirement phase and that is fine since neither of their transfer balance accounts exceeds $1.6m. And plenty of money to have a great time together.
31 December 2019
But then come 31 December 2018 and tragedy struck. John dies in a car accident.
Jane (as trustee) has to deal with the accumulation balance as soon as practical. So she cashes out the accumulation balance of $400,000. She can then re-contribute parts of it to start an additional pension but she doesn’t have to.
Jane doesn’t need to deal with John’s pension yet since it is reversionary. So her transfer balance account is not hit by John’s ABP. But her total superannuation balance includes John’s TSB as of the date of his death.
The fact that Jane’s TSB now exceeds $1.6m doesn’t matter though yet, since the TSB is assessed as of 30 June. And as of 30 June 2018, Jane’s TSB was still below $1.6m. So Jane can still make non-concessional contributions in 2018/19 even though her TSB went well past $1.6m upon John’s death.
30 June 2019
Now Jane’s high TSB becomes an issue – not for 2018/19 but going forward from 1 July 2018 onwards. Since Jane’s TSB exceeds $1.6m, she no longer can make any non-concessional contributions in 2019/20.
Jane’s TBA is unaffected though. Both Jane’s and John’s ABPs keep ticking along nicely. Nothing has hit Jane’s transfer balance account yet.
31 December 2019
The day of reckoning has arrived. John’s pension will now hit Jane’s TBA at the market value at John’s time of death. Jane needs to commute $400,000 (plus the amount of the second pension she started from John’s accumulation funds) of her pension account to make space for John’s pension.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.
Last Updated on 23 January 2023
Tax Talks spoke to Meg Heffron - Director at Heffron SMSF Solutions - for more details.
