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Self Managed Super Funds (SMSF)

A family affair: Children, super contributions and SMSFs

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

The potential increase in members from four to six a in self-managed fund has led to many to consider about whether it is worthwhile to have children as members of the parents’ or ‘family’ SMSF. The options are: should the kids join the fund, have their own, or go elsewhere to an industry or retail fund.

Let’s face it, on the positive side SMSFs are a good way of building retirement wealth and if done properly can boost the financial literacy of all members regardless of age – so why not have one exclusively for the whole family?

Pros and cons of a family SMSF?

Some media commentators may tell you that they wouldn’t recommend children as members or trustees of a family SMSF. Nonetheless, in some cases it can work exceptionally well, and the children can play an important co-operative component in the fund. There may be instances where a high level of respect exists among the family and decisions can be made collaboratively to the benefit of everyone.

At the other end of the spectrum, however, have a look at the ever-increasing number of court cases which are littered with sad stories. Some involve children taking money from the family fund for their own purposes, and other situations where children deceive their way into the fund as trustees and take over the parents’ super.

Whether the family SMSF should include children depends on the reasons for having them as members, their ages, personal situation and whether they are genuinely willing to take responsibility as trustees. Let’s look at the good, bad and the ugly of having children involved with the family SMSF.

Some reasons to include family members

There is no doubt that every family member is different and so is each child within that family. Parents need to exercise sound judgement on which child should be admitted as a member of the family super fund. A child who has difficulty managing their own personal finances may probably have the same issues as a member or trustee of an SMSF. They may be better off as members of a retail or industry fund where professional managers look after the fund investments.

Children can be split into three categories for superannuation purposes by age and circumstance – those under 18; single adult children; and those children in a relationship, possibly with their own family.

Children under 18 years of age

Super can be provided for children under 18 years of age by a parent or relative, by making child contributions up to $300,000 over a fixed three-year period which are not tax deductible. If the child happens to be working, contributions of up to $25,000 or more may be made by an employer, or the child may qualify to claim a tax deduction themselves. Any contributions will help provide a bigger pool of money for investing and remember - the benefit of compound interest on savings should not be underrated.

A child under 18 years of age can be a member of the SMSF but can’t be a trustee or director of a trustee company until they are at least that age. While the child is under the age of 18, it’s the child’s parents, guardian or their legal personal representative who is the trustee in the child’s place.

18 years old and over

A child 18 years of age or older has legal capacity in most cases and can be an individual trustee of the fund or director of the corporate trustee. Along with the other trustees of directors, they are responsible for the operation of the whole fund, as well as all the fund members, not just themselves. This could be a catalyst to involve a child in the investment of their super savings and understand the workings of an SMSF.

Whether you would allow any of your children who has a spouse, but no family themselves, to be a member of an SMSF depends on the situation. In many cases it may be worthwhile to include the child until they have enough benefits to start an SMSF for themselves and their partner.

Children with their own family

The time may come when your child has their own family. Whether they should become members of the family SMSF or have their own will depend on the situation. The same outcomes could be achieved by the child having their own SMSF as the fund may be able to make investments jointly with the parent’s fund.

Introducing family members to the ‘family’ SMSF

One way of introducing children to a family SMSF is that investments could be split among the members. Investments supporting the children’s super balances can be segregated from of their parents’ investments within the fund. This could be done by using separate bank and investment accounts and the records left to an SMSF accountant or administrator, who has the skills and systems to handle segregated investments, without incurring additional administration costs.

Having children in the family SMSF may also enable an inter-generational transfer of family assets – such as a commercial property used in the family business or other real estate. However, a word of warning, if this strategy is used it must be structured and handled correctly otherwise compliance problems may occur. There are a number of ways in which the investment could be owned by the fund either jointly, as a company or unit trust. The strategy can allow ownership of real estate by one SMSF, or split across different SMSFs, and allows flexibility if one fund wishes to purchase units or the property in future.

Case study

A family consisting of two parents (both age 62) and their two children in their 30s, are members of an SMSF which plans to purchase a shop that is used for the family business. The members’ balances in the fund are just about high enough to purchase the property on commercial terms without seeking a mortgage from a bank. However, to ensure the purchase can go ahead it will require the members to make additional contributions to the family fund.

The four seek advice from their tax accountant who is an SMSF specialist and she tells them that there are probably a few ways in which the shop could be purchased. Here are the options she has suggested:

1. The fund could purchase 100% of the property but it will require cash from the member’s contributions. This may have some issues as the fund will own a very lumpy asset and the fund’s cash flow will be tight for some years. If the children eventually decide to rollover their super to another fund, the shop may have to be sold.
2. The fund could purchase part of the property as tenants in common with the current owners, which would be possible from a cash flow perspective. However, the property could not have a mortgage over it, and it may be possible to pay out the mortgage as part of the fund purchasing the property.
3. A fixed unit trust or private company could be established, and providing there is no mortgage over the property, the fund could purchase units in the trust as well as other family members who would own the units personally.

Whatever strategy is decided on, the purchase may be helped by family members combining their resources from the SMSF to purchase the shop. In addition, the tax-deductible rent from the shop is paid to the owners, which would include the SMSF either directly or indirectly. If the children wished to run the business after the parents retire, then having the shop in the SMSF may mean an intergenerational transfer of the asset which is seamless.

Reasons for not having a family SMSF

There may be many positive aspects of having a family SMSF but unfortunately, there is probably a longer list of situations where things may get amiss.

Dipping into the fund

When children become members and trustees of the family SMSF they can be in a position where they can access to the fund’s resources. Access to the fund without proper controls over the fund’s bank accounts and investments can have tragic consequences.

For example, an SMSF may consist of a husband and wife and a drug-addicted son who left the fund almost penniless, in addition to the fund being treated as non-complying for tax purposes. If better controls had been exercised over the operation of the fund and the trustees understood their responsibilities, maybe the loss may not have occurred.

Relationship breakdown

In a relationship breakdown superannuation forms part of the partner’s assets which is included in the marriage settlement to determine how the assets will be split between the parties. This means that as part of the settlement that an ex-spouse may have access to their partner’s super in the case of divorce. It could mean having to sell the family business assets to free up cash as part of the marriage settlement agreement. The situation is not isolated to just the parents given that the children as members of the fund may also be going through a relationship breakdown.

Control on death

When it comes to estate planning and SMSFs, who has control is going is probably the most important factor when ensuring the wishes of the deceased member are carried out correctly.

There are many court cases where children have been appointed as trustees of an SMSF as the legal personal representative of their parents.

For example, a father and daughter are members and trustees of the SMSF. The father completed a non-binding nomination requesting the trustee to split his super balance 50/50 to the daughter and a son. The son was not a member or trustee of the SMSF at the time of his death, so the daughter appointed her husband and proceeded to pay 100% of her father’s benefits to herself. In this situation, the Court has found in the daughter’s favour – as trustee her (and her husband) had discretion as the nomination made by the father was not binding on the trustee.

Even if the nomination was binding, the fact that the daughter was in control of the SMSF could have caused a protracted and costly legal battle between the beneficiaries. Therefore, consideration needs to be given to the loss of control over the SMSF if a trustee or member dies or loses capacity.

To include or not to include, that is the question?

There can be many benefits by including children and other family members to an SMSF. But considerable thought should be given to the potential risks that can arise when family and money matters are combined.

It is important to weigh up the pros and cons before making such a decision as the different needs and motivations of family members may be different to your own and may only lead to conflict.

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
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While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. The information contained in this document are for illustrative purposes only and this document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
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