The families have already been able to claim £70,000 from the fund which has raised £18m following the 22 May bomb.
Its trustees have decided the victims' relatives could be eligible to receive a further £180,000 from the fund.
The total payments mean more than half of the money raised will be paid out with no conditions attached.
Trustees must now decide how and when to distribute the rest of the money, including awards to those who were seriously injured in the attack.
"We will now spend some time looking at how we will distribute the rest of the funds. This will be a complex and sensitive process as we will need to assess the long-term impacts of the attack," said Councillor Sue Murphy, chair of the trustees.
She said: "The city and the world responded with such extreme kindness, generosity and solidarity in the aftermath of the Manchester Arena attack."
Ms Murphy added: "We have raised more than £18m and we were conscious that we had to get some of this swiftly to those with immediate needs.
"We have therefore given around a third of the total to the bereaved families and £3.5m to those who were hospitalised after the attack."
The decision follows an earlier announcement from Manchester City Council about a second charity, set up to pay for victims' memorials.
The authority said it would complement the existing We Love Manchester Emergency Fund.
An advisory group of civic and business leaders is being formed to advise the council on all memorial-related issues and will include consultations with the victims' families.
The council said this advisory group would be "crucial in determining the form and location of any permanent commemorations".
Its first meeting will be in early September.
Families of the 22 people killed in the Manchester Arena attack could benefit from a further £180,000 from the We Love Manchester Emergency Fund.