The government is considering increasing the number of members allowed in a self-managed super fund (SMSF) from four to six. Families with more than four members and who manage their own superannuation will be especially interested in this proposal. If you have not included your children in your SMSF, there are benefits and potential traps that need to be considered.
Benefits
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.
Traps
There are however hurdles, disadvantages and risks associated with including children as members:
- Trustee decisions must be made in the best interests of allbeneficiaries 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 Fundwhich 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..
- 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 Grossmana 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.
It is advisable to seek advice from a suitably qualified professional if you wish to include children in your SMSF.
