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The family SMSF – a ‘go’ or ‘no go’ zone?

Sounds like a sensible idea, doesn’t it? Put the family in one super fund, make joint investment decisions, help the children save and heaps more reasons. Why not?

The best advice about the family SMSF is to ‘look before you leap’, make sure you’ve done your homework and have concrete reasons for the final decision. Don’t forget if you don’t get it right, you and maybe the rest of the family, may end up with no safety net and a big mess.

From my experience the decision to include family members as part of an SMSF can work well, but only in a limited number of cases. If everyone understands the purpose of superannuation, their responsibilities and respect each other’s views, then it can work well.

However, issues can arise when there are differences in members’ ages and younger family members may lack interest and skills, compared to their parents who may be close to retirement. There’s also the potential difference in investment choices by members as younger members may have longer investment time horizons than their parents. With those basics in mind, let’s have a look at the essential technical requirements of having an SMSF.

Trustee issues

The most essential requirement for an SMSF is that you can’t have any more than four members. This puts families with five or more out of the question if they are after just one fund. However, it could be possible to have two or more funds for larger families – maybe mum and dad in one fund and the kids in another.

The trustee structure of the SMSF is important to enable the fund to be administered properly. The general rule is that all members of an SMSF who have legal capacity must be trustees of the fund, or directors if there is a corporate trustee. If the children are under 18, they will need to have mum and/or dad to act in their place as fund trustee as they do not have legal capacity.

In the case of individual trustees, the fund’s trust deed may provide rules relating to the appointment and dismissal of trustees, as well as meetings and trustee voting rights. These are important, especially with a family fund, as they will lay the ground rules for the fund’s operation and who does what. It’s better to have it in writing than just some loose understanding, which can be misunderstood when things get hot under the collar.

Voting rights can be important when it gets to decisions about the fund, both from the point of view of individual trustees and a corporate trustee. The superannuation legislation requires each member to be a trustee or director, however, it does not stipulate voting rights of those trustees or how a casting vote operates. While it is usual that each trustee has one vote, it is possible to have voting rights based on each member’s balance or any other method. If the trustee is a company, in addition to the fund’s trust deed, the constitution of the company may provide rules on directors’ meetings and voting rights.

It is important for members to ensure that their rights are protected if they were to pass away. This can be done through having your legal personal representative become trustee or a director on your death. Careful wording of the trust deed can ensure this occurs automatically on your death. Having your legal personal representative as trustee will help to ensure the fund is administered correctly and your benefits are paid according to your wishes as provided in the fund’s trust deed. I think this is so important when it comes to family superannuation funds.

To ensure your benefits are paid as you wish, you may consider providing a reversionary pension to qualifying dependants, or make a binding death benefit nomination. If you are receiving a pension on your death, which has a reversion to a survivor, they will continue with the pension until their death, or they may have the option to convert it to a lump sum and withdraw the amount from the fund. If you have a binding death benefit nomination, your superannuation benefits can be paid to your dependants on your death and/or to your legal personal representative who can have the amount distributed according to your will. Correct legal drafting of these documents will help ensure that the nominations or your instructions are not subject to challenge.

Investment issues

Then there’s the investment side of the fund. Having members of different ages is not an impossible problem to solve, as they may all agree on a range of assets that are diversified and take the long-term perspective of the fund into account. In some situations, if the family is involved in a small business, it is possible to have business property in the fund, which can use superannuation savings effectively by leasing the property back to the family business. In the long term, if the children continue with the business they may retain the property in the fund as part of an intergenerational transfer of assets, which can be tax effective. Also, assets that are held in a superannuation fund are protected from creditors in the event of a member’s bankruptcy.

The day will probably come when the children may wish to move their benefits to another superannuation fund, so they will need their family share in the benefits of the family SMSF. This is something that needs to be planned, just like the original decision to have the original family SMSF in the first place. This will require decisions concerning the change in trustees or directors of the fund, reviewing investments and investment strategies, as well as transferring benefits to the new fund. It is worthwhile seeking advice to ensure this happens as smoothly as possible.

So, there are some things to think about if you and the family are thinking about having a family SMSF. Good planning, and understanding the reasons for having the fund in the first place, is essential for avoiding any potential messes that may prove impossible to fix.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.