There is a trend at present to promote Self-Managed Super Funds as the “Family Super Fund” and there can be a number of benefits to doing this if you get the right advice upfront. However, in my experience, it is rare to see circumstances where it is suitable to include children under age 18, as the strategy tends to be driven from the parent’s tax planning perspective.
Are there any rules about making your kids members of your SMSF?
One of the basic governing rules for SMSFs is that all members must be either individual trustees or directors of the corporate trustee and vice-versa (there is an exception for single member funds). The same governing rules, responsibilities and obligations will apply to your kids as they do to you in terms of being members and prudently running the SMSF, regardless of their aptitude and experience.
It is important to note that from a legal standpoint, children under age 18 are not able to hold positions of trustee or director; therefore they will require you to act on their behalf. Where this occurs it should be reflected throughout the SMSFs documentation (e.g. membership applications, trustee declarations, minutes of meetings, etc.) that you had dual capacities.
While you can represent yourselves and your kids in both capacities as SMSF trustees and members, you need to remember that you must act in the best interests of all members and not what may just suit you needs alone.
Under what circumstances does it make sense to include your kids in your SMSF?
The obvious benefits of Family Super Funds include aggregating everybody’s super to reduce the cost per member and providing your kids first-hand experience at managing money and making investment decisions. Pooling of everybody’s super may also allow investment in assets that were not possible individually.
Family Super Funds also have the advantage of assisting with the seamless inter-generational transfers of assets between members, for example the business premises that is leased to the family business, as well as providing access to grandfathered structures that are no longer available, such as “Pre-1999 Unit Trusts”.
Parents with disabled children that have received a settlement payment may find the Family Super Fund a more suitable way to manage their children’s affairs. Family Super Funds can be a great way for you to seed your kids’ retirement savings by making contributions with any surplus income that you have. One strategy involves ‘re-contributing’ any excess super that you withdraw that is surplus to your needs and allocating to your children’s super accounts.
Importantly, you need to remember that superannuation is a long term investment, and most people cannot access their super until normal retirement age (e.g. age 65). So you will need to balance up the desire to help your kids using your SMSF compared to other financial assistance they may need prior to their retirement.
What’s the best way to ensure they understand their obligations as a member and trustee?
Seek guidance from a professionally accredited ‘SMSF Specialist Advisor’ as they can assist you in determining if an SMSF is right for you and your kids, and outline the roles and responsibilities of managing your SMSF.
A practical way might be to have the advisor attend family meetings to provide input, and answer questions as they arise. Most SMSF Specialist Advisors have access to educational material aimed at the SMSF trustees’ level which can provide you the basics on running your SMSF. Remember rules change over time and as do people’s needs and circumstances, so the advisor’s role should be viewed as a long term relationship.
What are some of the issues in having your kids in your SMSF?
One very important consideration for you is that there may be fundamental differences between your needs and those of your kids. For example, you may be approaching retirement and may seek SMSF investments that provide more stable returns. This might be contrary to your kids who have a longer investment timeframe (till their retirement) who are happy to invest in more volatile growth type investments knowing they have time to ride out economic downturns and/or rebuild their super should the SMSF investments underperform.
Compounding this issue can be disproportion between member balances, where your super balances generally would be significantly larger than your kids. As parents, you may insist that your investment decisions be adopted by them and this can cause conflict. Liquidity may also be an issue when the SMSF’s investment returns and the (kids’) contributions are not sufficient to cover your minimum pension payments resulting in investments needing to be sold.
Last point to consider for larger families is that SMSFs can only have a maximum of 4 people at any one time. In these situations, sometimes the best decision might be to have the parents in their own SMSF without children so none of the kids feel they are missing out.
Any estate planning issues that should be considered?
SMSFs and estate planning go hand in hand and it’s one of the main reasons many people choose SMSFs. While there are many estate planning tools at your disposal (e.g. reversionary pensions, binding death benefit nominations, etc.), one area that tends to get overlooked is the restructuring of the SMSF trustee upon death of a member.
So many times I have seen the situation where shareholding in the corporate trustee being passed to a non-SMSF member through the deceased member’s Will (if they even have one!). This may provide the non-SMSF member the power to remove the current directors and effectively take over the SMSF to the detriment of the deceased member’s other beneficiaries. Therefore it is vital that your estate planning includes who will control your SMSF upon your death, and how this control will be passed onto them.
If you would like to know more about SMSFs please contact Jason McLaren on 0418 800 363 or visit our website at www.axiomsuper.com.au.
Jason is able to provide you with personalised financial advice about Superannuation & Retirement Planning through his Australian Financial Services License with Three Chairs Financial Services.
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The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice from a licensed financial adviser.
