Intergenerational SMSFs: the pros & cons
While spouses are typically the members of a self-managed super fund (SMSF), it’s also possible to include other family members, for instance children.
It’s important to be aware of the benefits and drawbacks of including children in an SMSF before making them members – and trustees.
Peter Hogan is the Self-Managed Super Fund Association’s head of technical. He says there are pros and cons to having an intergenerational fund.
“Cost is one of the biggest benefits. Often the kids are at an age where they don't have a critical mass of funds to open their own SMSF, but it's something they and their parents think is beneficial,” he says.
Helping to educate the next generation about the best way to manage wealth is another good reason to add your kids to your SMSF.
“It’s a good way to get them to focus on something that is important but obviously not necessary top of mind for someone in their twenties or thirties. The way the super system is now, you have to start saving earlier. The opportunity to add funds to the super system is becoming more difficult and there's no guarantee the rules won’t be even more restricted in the future,” says Hogan.
“Anything to encourage people to start putting a little bit of money away for their retirement sooner is a good thing. The combination of these factors could lead parents and children to being members of the same fund,” he adds.
Additionally he says for slightly older children, it might make sense from a family business point of view to own business premises inside the SMSF.
Hogan explains this can mean combining superannuation accounts to the right amount of funds to be able to acquire commercial property, which is usually an expensive asset.
“You might see children in their forties or fifties in the same fund as their parents so they can buy commercial property where the family business is located,” he adds.
While there are advantages to being in the same fund there are also drawbacks. For instance, a risk is the children won’t have as much say about how the money is managed, especially if the parents have substantially more wealth than the next generation.
“If everyone is in agreement, members can pool their investments together and all invest in the same way,” says Hogan.
Another risk is family members falling out, but that can also happen between husband and wife members.
Having children and parents in the same fund could also result in extra complexity for any family member whose working arrangements preclude super being paid into an SMSF.
This may mean the member has multiple funds, and pays multiple fees, impacting retirement savings. However, rules around this are relaxing and this may be less of a problem over time.
“The other thing from a practical point of view is properly engaging the younger members in the way the fund is run,” says Hogan.
Younger members have to be committed to attending meetings and contributing to make it worthwhile for them to be members of the fund.
When someone becomes a member of a fund they also become a trustee, which means they have strict duties to fulfil under superannuation laws. Children joining a fund must understand these obligations.
In terms of the practical aspects of adding children to a fund, Hogan says there should not be any particular limitations, as long as the trust deed allows it.
It’s also important all members, young and old, continue to contribute the amount to which they committed when the fund was established. People’s circumstances change, and if that happens, it can affect a family member’s ability to continue to be a member of the fund.
It’s worth thinking through these scenarios before the fund is set up and how the family will respond in their event.
SMSFs involving many people can be complex to deconstruct, and take considerable time, so when the fund is established it’s worth thinking about what will happen when it is wound up.
Finally, each family member must understand the legal responsibilities they take on and the benefits and drawbacks of being a member.
The right choice will be different for every family and it’s important to fully explore what it means to run an SMSF before establishing one.