Annie Dawson, senior SMSF specialist at Heffron, said in practice it can sometimes be difficult to pay death benefits if the SMSF has liquidity issues.
“Death can have a big impact, particularly if there are just two members in the fund, and they’ve got a big balance because suddenly it has this obligation to pay out,” Dawson said.
“And if [the death benefit] can’t be allocated as a retirement-based pension because the recipient isn’t eligible, or they don’t have the cap space, what is the fund going to do if the money is tied up in something like property?”
She continued that often the remaining member may want to – or need to – keep the property in the fund, and this is where strategies to get cash into the SMSF come into play.
One of those strategies is considering if there are existing members, or new members, who might like to join the fund where they can make contributions, or roll money into the SMSF.
However, Dawson warned that just because new money has come into the fund after the death of a member, it doesn’t necessarily mean it can be used to fund the death benefit.
“This is where you can use assets to pay a death benefit instead of cash. You could do an in-specie benefit payment with something like listed shares or property,” she said.
“There’s no restriction on who you can sell an asset to, so that’s why you would be allowed to cash out to a beneficiary or sell an asset to a beneficiary because that’s also what you would be doing with an in-specie benefit payment.”
Dawson explained in this situation two things are occurring – selling an asset and realising a capital gain on that asset.
“We’re also doing a death benefit payment at the same time. We can do that in-specie transfer and also sell the asset, because sometimes the remaining member(s) don’t want the asset, they would rather have cash.”
“However, it could be that you don’t have to sell to a third party. You could sell to someone within a family group, and again, there is no restriction on who you sell to in the family group. If you have another SMSF in the family group, it is going to have to meet special rules, but as long as you are selling the asset at market value from this fund, you can get cash to pay the death benefits. However, you would have to watch out for stamp duty and capital gains tax.”
