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What happens to an SMSF when a trustee dies?

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Q: My husband and I have an SMSF and both of us are trustees of the fund. I was recently told that an SMSF must have two trustees. What happens to the fund when one trustee dies?
 
A: One of the key requirements of an SMSF is that each member must be a trustee or a director of the corporate trustee company. Under ‘trust’ law, a trust is not valid if it consists of an individual trustee who is also the only beneficiary. But as single member self-managed super funds (SMSFs) are permissible, special rules exist to ensure that the SMSF is compliant with trust law.

The rules are different depending on whether your fund is set up with an ‘individual trustee’ structure or a ‘corporate treustee’ structure. For single member funds with an individual structure, an additional trustee is required. This person cannot be a member of the fund, nor an employee of the member trustee, unless they are related. Where a corporate structure is used, either an additional (non-member) director is required, or the member must be the ‘sole director’.

As most SMSFs use an individual trust structure, you are broadly correct in saying that an SMSF must have at least two trustees. So, what happens when one of the members dies?

Upon the death of a member, it is normal practice for the deceased’s legal personal representative (the executor or administrator of the estate) to act as a trustee or director of the trustee company. The legal personal representative can act as a trustee until such time as the death benefits start to be paid, which would generally be within six months of the member’s death. After the death benefits start to be paid, the legal personal representative would resign.

After that, a second trustee will need to be appointed. In the very common situation where both partners are members and each other’s executor, you would still need to find another individual trustee, such as an adult child, relative or family friend. Under SIS law, this person would need to be appointed within six months of the member’s death, and in any event, no later than after the death benefits start to be paid.

There is one other proviso – you also need to comply with any provisions in your fund’s trust deed that may relate to the death of a member and appointment of a trustee.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Published on: Saturday, November 17, 2012

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