Death in an SMSF – practical issues with individual trustees

3 Aug 2020

Meg Heffron

Managing Director


There are many issues to think about when an SMSF member dies. But what are the special impacts that apply when the fund has individual trustees?

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There is no doubt that SMSFs are best with a corporate (rather than individual) trustee. And there is no time at which that is more powerfully demonstrated than when one of the members (and therefore trustees) dies.

The most obvious impact is around asset ownership. With individual trustees all SMSF assets are owned in the name of the trustees. On death of one trustee, ownership will need to be changed to the new trustee. Often, that is the time when the surviving member (usually the spouse) chooses to put in place a corporate trustee. It’s also often at that point they wonder why they didn’t do it earlier. If the fund is to continue well after the death of the first member of a couple, a corporate trustee is almost inevitable at some point – why not do it earlier, at a time when their life wasn’t already full of new and complicated things to do as a result of the death of their loved one?

Another challenge is that assets such as bank accounts and investment platforms are usually frozen when one of the individual owners dies. This might put the surviving spouse in the position of being unable to make pension payments, pay tax bills or other expenses, or change investments until the right paperwork has been provided to the institution. In contrast, a company “lives on” and can continue to act as trustee despite a change in directors due to death.

One point to bear in mind is that when it comes to the law about who can / must be a trustee of an SMSF, there are some special rules that are relevant when a member dies.

Firstly, the law allows the deceased’s legal personal representative (generally their executor) to become a trustee in their place for a time. However:

  • this doesn’t happen automatically – it’s a step that would need to be explicitly taken in accordance with the usual trust deed rules for appointing trustees. Some trust deeds do provide for the automatic appointment of a legal personal representative on death.  However, superannuation law still requires the new trustee to formally consent to act in that capacity to be effective.
  • The ability for the executor to “stand in” for the deceased is still effective even if there are multiple executors – either one, some or all of the executors can become trustees of the SMSF under this rule,
  • but the special rule only applies until the death benefit commences to be paid. In cases where the deceased was receiving only a reversionary pension that automatically continued to the surviving spouse, this period is over before it even starts!

The time limit might not matter if – for example – the executor was the deceased’s adult child and there was only one member of the fund (the surviving spouse). This is because any single member fund can have two individual trustees under the normal SMSF rules. Even once the special “stand in” rule has ceased to apply, this structure would be fine (assuming the surviving spouse is comfortable with that adult child being in a position to control the fund on their own death or incapacity). 

It does become problematic, however, if the executor was the surviving spouse. As soon as the special stand in rule ceases to apply (because the death benefit starts to be paid out), the trustee structure is again outside the normal rules – a single member fund cannot normally have a single individual trustee over the long term. The same applies if the executors were (say) multiple adult children. Over the long term, a single member fund cannot have both that member and multiple other people as individual trustees.

A second important rule is that under most circumstances, any fund that breaks the normal SMSF trustee requirements has 6 months to fix it. This gives several useful options in practice when one member of a fund with two individual trustees dies:

  • Even beyond the timeframe described earlier for the special “stand in” rule, the fund has 6 months where an “incorrect” trustee structure can continue. For example, the surviving spouse may continue to be the single individual trustee even if the death benefit has been dealt with in full because it was a reversionary pension that automatically continued to the surviving spouse (but only for 6 months after death).
  • Sometimes, the surviving spouse will decide to wind up the fund during that 6 month period. That actually means they never have to “fix” the trustee structure.

All that said, we still favour moving to a corporate trustee well before having to deal with the death of a member.

Heffron has many other blog articles on dealing with death in an SMSF – see previous articles on our website (https://www.heffron.com.au/news/tags/death). We will also provide an update on the latest issues to consider in our forthcoming Super Intensive Day (https://www.heffron.com.au/events/super-intensive-day). Don’t miss it!