In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
I’ve written before about some of the steps we can all take to ‘future-proof’ our SMSFs in anticipation of the death of a member and even steps that can be taken after a member dies. But some recent work with a longstanding client who has just lost his wife reinforced for me that there is a vital period shortly after the death of the first member of a couple that is probably unique enough to warrant a separate discussion.
So at the risk of being unduly morbid – this article is about exactly that: what to do quickly and what to do slowly when your spouse dies. Throughout, I’ll assume the intention is that the surviving spouse will inherit the money one way or another. While not all couples work this way, it’s the most common outcome and certainly the one with the widest array of decisions to make.
Perhaps the most important thing to realise is that legally, very little needs to happen urgently in an SMSF when the surviving spouse is already a member and trustee. We know the deceased is no longer trustee and that needs to be reported to the ATO and, in the case of a corporate trustee, to ASIC. In fact, the death may prompt a move to a corporate trustee for the first time which has its own stream of work (setting up a company, moving the investments to their new owner etc). That’s important but the long-term trustee structure doesn’t have to be resolved urgently. There’s a 6-month window where it’s entirely legal to have, for example, just one individual trustee.
We also know that ‘something needs to happen’ with the deceased’s super benefit – it’s not allowed to just stay in the fund or get moved across to the surviving spouse’s super account. But again, the legal requirement is to deal with the death benefit “as soon as practicable”. The ATO has a rough rule of thumb that this means somewhere within 6 months. There’s no urgency.
Moving quickly
To my mind there are really only two things that should happen quickly.
First, if the deceased was receiving a pension, double check to see whether it was reversionary (continued automatically to the spouse). If it was, the normal minimum pension has to be paid before the end of the financial year. This will be the amount worked out at the start of the year – ie, whatever it would have been if the member hadn’t died.
If the pension wasn’t reversionary, nothing more should be paid out of the deceased’s pension(s) after they died. Any payments made after death will be death benefits – and that’s not necessarily the ideal result. So unless the spouse also has a pension and wants to keep taking the regular payments (knowing they’ll all come from their own pension instead of being shared), adjust any existing direct debits out of the fund.
The second thing to check is more about the surviving spouse: if they were to inherit as much as possible of this super as a pension (and we’ll come to that decision later) what would that do to their total super balance? The reason this is important is that sometimes it means there is a limited time available to make decisions about contributions for the survivor.
To explain using an example, consider Trish (age 70). At 30 June 2023, she had $1.5 million in super. Her husband Matt (also 70) just died in April 2024. He also had $1.5 million in super. Let’s assume they intended their super to go to each other and Trish wants to leave as much as she can in their SMSF. If Matt’s super had already been converted to a pension and it was reversionary to Trish, her total super balance will immediately become $3 million.
That’s significant.
It means she has too much in super to make non-concessional contributions in 2024/25 and beyond. That’s because she can only make non-concessional contributions in 2024/25 if her total super balance at 30 June 2024 (the previous 30 June) is less than $1.9 million. Trish might want to move quickly and get one last contribution in (say $330,000 non-concessional contributions) during the last few months of 2023/24. (To do this, she’d use the special rules that allow people with balances at Trish’s level - $1.5 million at 30 June 2023 – to contribute three years’ worth of the normal $110,000 non-concessional contributions cap at once. Effectively using her 2023/24, 2024/25 and 2025/26 caps all at once while she still can.)
Even though her super has now gone up to $3 million in value in April 2024, it doesn’t affect her ability to make contributions this year. For this year, that’s all based on the size of her super balance back at 30 June 2023 ($1.5 million).
She might not want to add to her super (she does have $3 million now, after all). However, she might still value the chance to make some last ditch non-concessional contributions. She could, for example, quickly take a lump sum from Matt’s pension account that she re-contributes to her own super before 30 June 2024. Why? Because if Matt’s super has all come from employer contributions and earnings, it will all be taxed at 15% (+ Medicare) if their adult, financially independent children inherit it when she dies. If she takes some out and puts it back in again, that bit will be tax free to them when they eventually inherit it.
But this all assumes Matt’s super went to Trish automatically via a reversionary pension. What if his super was paying a non reversionary pension? Or not paying a pension at all (ie, still accumulating)?
The key difference here is that Matt’s super doesn’t automatically get added to Trish’s total super balance. In fact, that will only happen if and when Trish uses that money to start a new pension from his balance.
Moving slowly
What if she moves slowly so that doesn’t happen until 1 July 2024?
Then, Trish’s total super balance will still be less than $1.9 million at 30 June 2024 (it will be just her own $1.5 million until the next day). So she can make non-concessional contributions in both 2023/24 and 2024/25. For example, she could contribute $110,000 in June 2024 (using just one year’s contribution cap) and a further $360,000 in July 2024, using the next three years’ caps all at once while she still can. (Contribution caps are going up next year – that’s why it’s $360,000 rather than $330,000.)
Importantly, Trish should think about these things urgently so that she can take action before 30 June 2024 if she needs to.
Another big decision to make, of course, is what she’s going to do with Matt’s super in the long run. It can only stay in their SMSF if it’s paying a pension to Trish. What if Trish already has a pension and has already used up her ‘transfer balance cap’ (the lifetime limit on the amount anyone is allowed to put in a super pension in retirement). It may look like she hasn’t – after all, this cap is $1.9 million these days and her balance was only $1.5 million. But in fact, back when her pension started the cap might have been $1.6 million. Perhaps she started a pension with the full cap amount, and it’s drifted down in value over the years as she’s taken pension payments. Unfortunately, she won’t get to put anything extra into a pension now just because the cap has increased. If she used it in full in the past, she’s considered to have used it in full forever.
But she can stop her own pension and put that balance back into an accumulation (non-pension) account. The reason that’s a good thing is that it gives her $1.5 million worth of transfer balance cap ‘back’. Conveniently in this example, that’s just enough to allow her to turn Matt’s super into pension. People often find they switch their own super back to accumulation phase when they inherit super from a spouse for exactly this reason – they want to leave their inheritance in super. They can only do that if they can convert it to a pension, and so they replace their own pension with one from their spouse’s super.
Of course, if Matt’s pension was reversionary to Trish, it will have moved to her name immediately – she’ll have two pensions (adding up to $3 million – way too much) running at the same time. Fortunately, the law recognises people won’t be able to respond instantly when that happens. There is a specific rule giving people like Trish up to 12 months to sort things out.
And this is another scenario where thinking quickly but moving slowing could be helpful for Trish. The great thing about having both those pensions running is that Trish’s SMSF doesn’t pay any income tax on investment income like interest, rent, dividends and even capital gains. (This is a generous tax break available for super pensions in retirement.) As soon as she sorts things out by stopping her own pension and putting it back into an accumulation account, the SMSF will start paying income tax again – on roughly half its investment income.
If I was Trish, I’d be wanting to put that off for as long as possible – probably the full 12 months.
In fact, funnily enough, this great tax benefit for the SMSF will continue for a time even if Matt’s pension wasn’t reversionary (so technically it stopped as soon as Matt died). That’s because – again – the law recognises that people can’t re-arrange their affairs immediately. So while this pension is in limbo, tax law continues to treat it as a normal pension.
Finally, Trish’s position is such that she’s able to leave all Matt’s super in their SMSF because, after some re-arranging of her own pension, she could convert the full amount to a pension. What if Matt had a lot more super? Too much for Trish to put into a pension? Well, that has to be paid out of their fund. That creates a whole other stream of decisions – what assets will she sell to move a large amount out of super? If Matt has both a pension and an accumulation account, which one will she take this large amount out of? Is there an ideal time to make the payments (quickly or slowly)? And more. Believe it or not there are options and ‘best approach’ answers to all of these questions. A topic for another day.
All in all, the surviving spouse has a lot to think about when a member of an SMSF dies. And while it pays to understand the options quickly, often they’re best served by moving a little more slowly.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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