If you manage your own self-managed super fund (SMSF), have you considered including your children as members?
From 1 July 2021 the number of members allowed in a self-managed super fund (SMSF) increased from four to six. Families with more than four members and who manage their own superannuation may have already updated their funds accordingly. If you have not included your children in your SMSF, what are the pros and cons?
What are some of the benefits of including children as members of an SMSF?
Including your children as members of your SMSF can achieve several desirable benefits:
- SMSF are a great vehicle for building wealth and have the potential to increase the financial literacy of the family;
- More members increase the liquidity and volume of funds available to the SMSF. By combining your superannuation with that of your children your fund may be able to buy more expensive investments;
- Having your children contribute cash into the fund may assist in the fund to meet the pension obligations of older members; and
- With more members the fixed costs of administering the SMSF may be reduced per member.
What might prevent me from wanting to include my children as members?
There are however hurdles, disadvantages and risks associated with including children as members:
- Trustee decisions must be made in the best interests of all beneficiaries not just those with a majority balance. Members may have competing priorities, and this affects the implementation of an investment strategy for the SMSF that suits everyone. Ideally, you should segregate your benefits from those of your children – i.e. maintain separate bank and investment accounts in the SMSF – however, running separate investment portfolios and allocating earnings to the specific account balances supported by a particular portfolio can bring additional administrative complexities.
- What are your children like? Are they suitable people to be part of your SMSF? Remember, your children will have access to the resources of the fund. Perhaps an extreme example of where this went wrong was the Triway Superannuation Fund which was established with three family members: Mum, Dad and Son, where the son had a drug addiction and withdrew virtually all the monies of the SMSF. This left the parents with a non-complying SMSF and no super.
- What happens if your children’s marriages or de-facto relationships breakdown? Superannuation is vulnerable to Family Court disputes. Imagine having to sell the property used in the family business to free up cash to pay out your child’s ex-partner. If your children are members of your SMSF, you should consider asking them to enter into binding financial agreements with their partners or spouses (read more here and here for more about BFAs).
- Do you want to share control? All members of the fund must be a trustee or director of the trustee company. By including your children as members of your SMSF you risk being out voted by your children in the running of the SMSF, unless you introduce adequate controls. Your SMSF will need a workable dispute mechanism for the SMSF. This may require a trust deed amendment.
- Illiquidity of assets may be a problem. If your child wishes to leave the SMSF, rolling out a child’s balance into another fund if your SMSF has assets such as a property rather than cash or shares, could prove difficult. To be able to do this, you need to ensure that the SMSF has cash available when the time comes.
- What happens when a member dies or loses capacity? Who will control of the fund and how will benefits be dealt with when a member/trustee dies? In the notorious case of Katz v Grossman a father and daughter were members and trustees of the SMSF. The father completed a non-binding nomination requesting the trustee to split his super balance 50/50 to his daughter and son. The son was not a member or trustee of the SMSF at the time of his death, so the daughter appointed her husband as a trustee and proceeded to pay 100% of her father’s benefits to herself. In the ensuing dispute, the Court found in her favour – as trustee she (and her husband), in the absence of a binding death benefit nomination, had the sole discretion as to whom the deceased’s superannuation death benefits should be paid.
However, there are practical and legal solutions to ameliorate these risks.
How we can help you
If you are thinking of adding your children to your SMSF we can:
- Help you decide the course of action that best suits you;
- Advise you on the advantages, disadvantages and risks associated with each option so that you can make fully informed decisions; and
- Assist you to document whichever option you decide to implement.
Be aware that your existing SMSF trust deed may not allow you to automatically increase the member numbers without some amendment. If you would like to discuss your options, call us now on 1300 654 590 or email us.
The information contained in this post is current at the date of editing – 27 July 2023.