Many Asian families in Australia hold much of their wealth outside their personal names: in a self-managed superannuation fund (SMSF) that owns property, and in a family company that runs the business or holds investments. Often the founder is a member and director of the SMSF’s trustee company, and also the main shareholder and sole or main director of the family company.
When that person dies, their Will does not automatically control either structure. Superannuation is governed by the SMSF trust deed and superannuation law. Shares are estate assets, but who controls the company depends on its constitution and who the directors are. Planning both together avoids families being locked out at the worst moment.
Part 1: SMSFs when a member dies
Who controls the fund now?
An SMSF must generally have all members as trustees, or as directors of a corporate trustee. When a member dies, the structure usually has to change. The ATO says trustees have six months after the death to restructure, and changes in trustees must be reported to the ATO within 28 days.
In most cases, the deceased member’s legal personal representative (the executor, or the administrator if there is no Will) can take the deceased’s place as trustee or director until death benefits start being paid. Other options include appointing a new trustee or director, or rolling the benefit out and winding up the fund.
Corporate trustees make this transition much easier. With individual trustees, title to fund assets such as real estate may need to be transferred to the new trustees. With a corporate trustee, the company continues and only its directors change.
Death benefit nominations
A member’s superannuation does not form part of their estate unless it is paid to the estate. Who receives it depends on:
- The trust deed: the ATO is clear that the deed must be followed even if it differs from the member’s Will. SMSF deeds vary widely in what nominations they allow and how they must be made.
- Binding death benefit nominations: if a valid binding nomination exists, the trustees generally must follow it. Some SMSF deeds allow nominations that do not lapse; others require renewal. A nomination that does not comply with the deed’s formal requirements may be invalid.
- Superannuation law: benefits can generally only be paid to dependants (spouse, children, people in an interdependency relationship) or the legal personal representative.
- Trustee discretion: without a binding nomination, the remaining trustees decide, within the deed and the law. This can create conflict if the remaining trustee is also a potential beneficiary, for example a second spouse.
Paying the benefit “as soon as practicable”
Superannuation law requires a deceased member’s benefits to be cashed as soon as practicable after death. There is no fixed deadline, but delays should be justified and documented. Dependants can usually take a lump sum or an income stream. Non-dependants, such as adult children who are not financially dependent, must take a lump sum, and taxable components paid to them can attract tax.
If the fund holds illiquid assets, such as a commercial property used by the family business, trustees may need to sell the property or transfer it in specie to the beneficiary. Planning this in advance matters.
Part 2: company shares when a shareholder dies
Shares pass under the Will
Shares held in a deceased person’s own name form part of their estate. They pass under the Will, or under the intestacy rules if there is no valid Will. Shares held by a trust or by another company do not; they follow the rules of that trust or company.
Transmission of shares
The executor does not automatically become a shareholder. Under the Corporations Act replaceable rules, which apply unless the company’s constitution displaces them, the personal representative can apply to be registered as the holder of the shares, or can transfer them to a beneficiary. In a proprietary company, directors often have power to refuse to register a transfer. Many family companies have their own constitution that changes these rules, for example pre-emptive rights giving other shareholders first option to buy.
The executor usually needs a grant of probate (or letters of administration) before the company will act. The company register is then updated, and ASIC is notified.
Control of the family company
Control comes from two places: voting shares and the board of directors. Common issues include:
- Different share classes: some shares may carry votes and others only dividends. Gifting “equal shares” to children may not give equal control.
- Who inherits votes: passing all voting shares to one child, or to a testamentary trust controlled by one person, changes the balance of the family.
- Shareholder agreements: these may contain buy-sell provisions on death, sometimes funded by insurance.
Directors
If a director dies, the remaining directors usually continue to run the company. The real problem arises when the deceased was the sole director and sole shareholder. Without a director, no one can operate bank accounts, sign contracts or pay staff. The Corporations Act allows the personal representative of a deceased sole director-shareholder to appoint a new director, but in practice this often waits for the grant, which can take months.
Useful planning steps include appointing a second director while you are well, adopting a constitution that deals with death, and making an enduring power of attorney that covers your shareholding.
Checklist for SMSF members and company owners
- Read your SMSF trust deed and check it is up to date.
- Confirm whether your SMSF has a corporate trustee; consider one if not.
- Make or review a binding death benefit nomination that complies with the deed.
- Plan for who will control the SMSF after you, including an executor willing to step in.
- List all company shares and how they are held.
- Read the company constitution and any shareholder agreement for death provisions.
- Consider appointing an additional director, or an alternate.
- Make sure your Will, SMSF nominations and company documents are consistent.
Frequently asked questions
What happens to an SMSF on the death of a member?
The remaining trustees, often with the deceased’s legal personal representative, must restructure the trustee arrangement within six months and pay the death benefit as soon as practicable. Who receives the benefit depends on the trust deed, any valid binding nomination and superannuation law.
Does my Will control my SMSF?
No, not directly. Your super only follows your Will if it is paid to your estate. A binding death benefit nomination, made in line with the deed, is usually the way to direct it.
What happens to shares in a company when a shareholder dies?
The shares form part of the shareholder’s estate. The executor can usually be registered as the holder, or transfer the shares to the beneficiary named in the Will, subject to the company’s constitution.
What happens if the sole director of a company dies?
The executor can usually appoint a new director, but often only after obtaining probate. Until then the company may be unable to operate, so appointing a second director while you are alive is often prudent.
How Chua Tan Associates can help
We help families plan for SMSFs and family companies as part of their estate plan: reviewing trust deeds and nominations, coordinating Wills with company constitutions, and advising executors on restructuring a fund or taking control of a company after a death. We work with your accountant and financial adviser and with lawyers overseas where the family’s business spans several countries. We advise in English, Mandarin and Cantonese.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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