By Darren Withers

From 1 July 2021, a Self Managed Super Fund (SMSF) can now have up to 6 members. This means that a couple can have up to 4 of their children as members. But is this actually a good idea?

This is a question that we’re often asked. The younger generation aren’t always as engaged in their super as we might like. So, parents worry that their kids’ retirement nest egg may suffer from poor performance or high fees.

Adding adult children to the family SMSF may provide some cost savings and potentially help the kids become more interested in their retirement savings. However, this decision is not simple and there are a number of potential traps that SMSF trustees should be aware of before inviting family into their fund.

Trustee Responsibilities

A feature of an SMSF, is that all members of the fund must be trustees. This means that every member of the fund is legally responsible for the running of the fund, including having voting rights over investments. While parents might be happy having some control over their child’s super, how many are happy with their child having control over theirs? Family disagreements may pose a problem, as trustees need to make a decision jointly. What happens if the family disagree on the running of the fund?

Unfortunately, we do sometimes see family members face challenges with gambling or substance abuse. If a situation like this led one of the trustees to withdraw money from the fund, the resulting penalty would impact all of the trustees. This is because all trustees are jointly liable for breaches in the fund.

Different time frames and risk profile

When deciding on an appropriate investment strategy, fund trustees need to take into consideration the investment time frame and appetite for risk of the members. As a result, the ideal investment approach for someone with 5 years left before retirement is very different from someone who may still have 40 years left in the workforce.
While parents may have a very well-thought-out and sensible strategy, this same strategy is unlikely to be suitable for their children.

Estate Planning

When a member of a self managed super fund dies, it is the other members that must make decisions about how the deceased’s super should be paid out. Often this creates conflicts of interest, and results in disputes between family members. By adding a family member to the fund, you are giving them a say as to what happens to your money when you die. You also have a say in what happens to theirs. Therefore, you need to carefully consider what effect this may have on the family’s estate planning arrangements.

Insurance

Commonly, younger people can feel pretty ‘bullet-proof’ and so considerations like sickness and disability insurance are ignored. Luckily, most industry funds and large employer funds have a basic level of cover. By leaving their existing fund, your children might also be ceasing their only insurance cover. The self managed fund will give them the opportunity to seek out a better quality and/or potentially cheaper cover. However, unless they are engaged with this and willing to go through the process of underwriting, they will potentially end up with no protection against these risks.

There are situations where having more than one generation in an SMSF may prove to be a good strategy. However, the broader implications and risk of doing this need to be considered. Your Elston adviser can assist you to determine if this may be right for your family.

If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.