Q: We are considering including our adult children in our Self-Managed Superannuation Fund (SMSF). We want to pool our funds and ensure that we educate our children about investing and engaging them with their superannuation. What should we be aware of, and is this a good idea?
A: For those of you who know the film, The Good, The Bad and The Ugly, it starred Clint Eastwood and was released in 1966. The film has the most identifiable theme song for Westerns (click here). Be sure this does not become the background music when dealing with members of the fund!
A family SMSF can deliver some distinct advantages to all the members of the fund. We have seen family SMSF’s that have worked very well and overtime have provided the wider family with the outcomes you have mentioned. It is a great mechanism to have your children engaged with their superannuation.
The decision to become a member and trustee can make sense for adult children in their late 30’s / early 40’s that have a healthy superannuation balance. Some of the advantages include:
- Allows members to pool funds and access investment opportunities such as investing into commercial property that will be leased to a business operated by of the members of the fund.
- Each member brings different perspective and experience which can be a positive (and sometime a negative) when choosing investments and operating the fund.
In the longer term, adult children can assist with the running of the fund when their parents become elderly. Having a SMSF in place with elderly members is a cause for concern in the following areas:
- Loss of legal / mental capacity: the role of trustee is important and the existence of cognitive dissonance needs to be considered. In a recent Blog Post, Andrew Heaven our Principal & Financial Adviser considered the impacts and what needs to be considered – click here.
- Passing on your legacy: passing your wealth onto the next generation and how this will impact the SMSF. For example, member benefits must leave the Superannuation fund when paid to adult non-financially dependent children. This could cause problems for non-divisible assets such as property.
Some practical hints and tips before allowing your children to become members include:
- Engagement: Include them in the decisions and meetings with the fund’s network of professionals including the fund’s accountant and financial adviser.
- Intergenerational trustees: Discuss the investment strategy of the fund and how you could accommodate different outcomes and needs. For example: more income generating investments for retired members and younger members more growth orientated (such as international shares).
- Review and discuss your role as trustee and what it means. The Australian Tax Office’s website provides guides and supporting information – click here.
With the maximum number of members of a SMSF being four, some clients have some hard decisions if they have more than 2 children. Which one to exclude, otherwise, commencing a second SMSF could be considered subject to complexity and costs involved.
Growing families and changing dynamics with a new spouse can pose a challenge. Your son or daughter may remain within the fund or seek to commence a new SMSF with their spouse. This should be given consideration before long term investments (such as property) are purchased. Otherwise, some of the assets held within the fund could be transferred across to the newly created SMSF by way of in-specie transfer.
Having a clear exiting strategy in place is important. The older members in the fund may seek to dispose of certain assets to provide a higher level of income whilst in retirement phase. This can be discussed as part of the annual review of the investment strategy and portfolio construction along with your financial adviser.
All trustees and members must agree on the decisions and running of the fund. It is your trust deed that will assist should you have a difference of opinion on basic matters (such as investments), and having deadlock breaking provisions can allow a casting vote.
However, it also goes a little deeper than this. All members/trustees of the fund need to sign off on annual accounts and taxation returns. Failure to complete these basic tasks on time does create headaches let alone administrative penalties from the ATO.
So what next?
Therefore, whether or not a family SMSF is a good decision depends upon your individual and family circumstances. We recommend that you seek advice from an expert. Should you be in any doubt about your children’s maturity, their ability to execute their role as trustee and future complications, then it best to play it safe, and retain the status quo.