My client recently died. I know superannuation death benefits need to be dealt with “as soon as practicable” after death but how long is “as soon as practicable”?Join our newsletter
The answer to this question will depend on the circumstances of your client and their superannuation fund. Many non-SMSFs will find it relatively easy to make payment of a death benefit within only a few months if it is fairly straightforward to identify all the potential beneficiaries.
For SMSFs, the ATO’s general rule of thumb is that six months should be long enough to pay most lump sum death benefits or get death benefit pensions in place. However for many SMSFs, the process will take longer than six months. The important part is making sure the SMSF trustee:
- has valid reasons for any delay beyond six months (eg taking time to seek specialist advice, taking time to determine the validity of any death benefit nominations), and
- documents those reasons together with why they are still considered within the “as soon as practicable” timeframe.
What about delays in selling assets – is that an acceptable reason for taking longer than six months to deal with a death benefit?
Whilst it can take time to sell illiquid assets such as properties or investments in unlisted entities, SMSF trustees should bear in mind that they were required to consider the liquidity needs of the fund in the event of benefits needing to be paid when setting the fund’s investment strategy. For this reason, we understand the ATO will generally not accept long delays in the payment of death benefits due to liquidity needs without other extenuating factors.
Importantly, for most SMSFs, a lump sum death benefit can be paid by transferring an asset directly to a beneficiary (at its market value) rather than making a cash payment (commonly referred to as an “in specie transfer”). While this is not without its challenges, it is an option to consider if it is difficult or undesirable to sell the assets for some reason. Note that an in specie transfer would be considered a disposal of the asset by the fund for capital gains tax purposes, and an acquisition of the asset by the beneficiary for stamp duty purposes – this means an in specie transfer is generally not a way to avoid any such costs.
The “as soon as practicable” rule and the consequences if it’s not met is just one of the issues I’ll be exploring in my “Death – there’s still more to talk about” session at our upcoming Super Intensive Day on 5 November 2020. View the full event agenda and register here.