SMSFs are also commonly known as Mum and Dad funds. However, did you know that it doesn’t need to be limited to just Mum and Dad?
An SMSF can have up to four members. There the only restriction when it comes to the members you are allowed in your fund is that members cannot be in an employer/employee relationship with each other unless they are related. What this means for members in SMSFs is that you can have multi-generational funds. You can have mum, dad, and children all in the same structure.
How does it work?
If you are starting a new fund, you simply have all members applying for membership at the same time. If the SMSF already exists, then the trust deed should be consulted regarding the manner in which a new member can be admitted. To remain within the definition of an SMSF, each member needs to be a trustee, and each trustee a member. This may mean that, if the fund has individual trustees, the trust deed may need to be updated. If the fund has a corporate trustee, the new member simply needs to be appointed director of the corporate trustee.
How is the profit allocated across the members?
This works in the same way as most other super funds – typically the fund assets are pooled between all members. The income and expenses are then allocated to the members proportionately depending upon the superannuation balance each member has, how much has been contributed and when, and if any withdrawals have been made during each financial year.
Why is having other family members in my SMSF an advantage?
- Cost: SMSF administration costs typically cost more than the larger retail funds on a percentage basis, particularly when it comes to smaller superannuation balances. Pooling the superannuation balances of multiple members tends to make a SMSF more viable for all the members, especially in fixed fee situations. This is a very good advantage as cost can be one of the highest deterrents when it comes to starting an SMSF.
- Take advantage of the skill of a trusted family member: People are often more comfortable leaving the administration of their superannuation in the hands of a family member, particularly if they’re financially oriented or have time to contribute to the management of the fund. It can also be a way to teach the younger members how to manage the fund as well.
- Cash flow when partly in pension phase: The older members might be in pension phase, which requires a certain level of liquidity to ensure the minimum pension requirements are met. Having accumulation members contributing to the fund can help with meeting these cash flow requirements.
What should you watch out for when considering including other family members:
- The four member limit: Families aren’t necessarily 4 members. If there is more than 4 in a family, there can be difficulties in choosing which children to include and can result in family arguments and rivalry. This can also be a particular issue when it comes to estate planning.
- Risk profiles can vary widely with the generation gap: Those who are younger tend to have a higher risk profile compared to those nearing retirement. Multi-generational members are less likely agree on what investments are appropriate for the fund. Segregation of the fund’s assets (meaning that each member has their own bank account and assets in the fund) might be more appropriate in this case, however this tends to increase the administration costs of the funds.
- Longer term, the younger members may want to combine their super with their own spouses and families: Unwinding structures and paying out members to transfer their super can have unwitting consequences. The fund may need to sell assets and realise capital gains/losses, and trust deeds may also need to be changed if members leave. Having a corporate trustee helps in this circumstance.
What if they’re not of legal age? Including your children and/or grandchildren.
If your fund’s trust deed allows, you may also admit minors to your fund. They generally apply for membership as required by the deed (often done by their parent or legal guardian), however, they do not become a trustee/director until they reach legal age. As previously mentioned, if the trustee of the fund is a company, they then simply need to be added as a director, otherwise if the trustees are individuals the deed of the super fund will need to be updated.
While treating most SMSFs as single generation continue to be the norm, having a multi-generational fund may make more sense in your particular situation. It can certainly make having an SMSF a much more feasible prospect when it comes to costs and time. If you’re considering it, have a chat with your family to make sure you’re all on the same page – communication is key – and we’re here to help if you have any particular questions.
