Family SMSFs: The advantages and disadvantages

As Australia’s population rapidly ages, countless SME owners nearing retirement are confronting a pressing decision about whether to admit their adult children into their self-managed super fund as part of their personal and business succession planning.

Their decision can have a critical impact on family relationships and family finances – particularly if the parents and adult children work together and share ownership of a family business.

Tax and superannuation specialist Peter Bobbin, senior principal of Argyle Lawyers, expects the number of intergenerational self-managed funds run by SME owners to significantly increase over the next few years. And he expects increasing instances of three generations of the same families sharing SMSF membership and business ownership.

Bobbin is enthusiastic about the potential benefits of well-planned intergenerational self-managed super funds for SME owners where appropriate. However, he urges the different generations of a family to think carefully about whether they really want to “get into the same super bed together”.

It is crucial for SME owners to compare the possible advantages and disadvantages of intergenerational SMSFs, says Bobbin. “The simple fact is that money can change people.”

Family and superannuation lawyer Stephen Bourke, a director of Certus Law in Canberra, says adult children joining their parents’ SMSF can provide benefits for a family “provided everyone understands the risks such as the breakdown of the parents’ or children’s marriages”.

Potential advantages

1. Estate planning/business succession: A popular strategy among family SME owners is to hold their business premises in a family intergenerational SMSFs as part of their estate and business succession planning.

Generally, the object is for the business premises to remain in the SMSF indefinitely as the ownership and management of a family business passes to the next generation.

A common aim is to build-up enough assets in the SMSF to pay out the parents’ retirement and death benefits when necessary.

“The cost of passing family business assets – particularly real estate – to the control of the next generation can be unaffordable without using an SMSF, says Bobbin.

2. Cost minimisation: By having two generations of a family in the same SMSF, a fund’s fixed costs are shared over a larger number of members.

3. Assistance in running the fund: Manyadult children join their ageing parents’ SMSF to help make administrative and investment decisions for the fund.

Nevertheless, children can assist their parents without going to the extent of becoming fund members.For instance, parents can grant their children enduring power of attorney granting authority to make financial decisions including if mental capacity is lost.

4. Opportunity to learn about family finances: Stephen Bourke of Certus Law says adult children can learn more about family finances and investment practices by joining their parents’ SMSF.

Potential disadvantages

1. Family conflicts: These can include disagreements over SMSF investment decisions or family business decisions, break-up of parents’ or adult children’s marriages, personality clashes – the list seems almost endless. And family conflicts can trigger the division of fund assets and, sometimes, the forced sale of fund assets.

Bourke, who is the author of Super Splitting for Family Lawyers, says “dismantling, disentangling and dividing SMSF assets can be messy”.

2. Different investment goals, risk tolerances and investment ideas: Such differences can make running an intergenerational SMSF difficult. Depending upon a fund’s trust deed, it can be possible to run different investment segments for different members – but this can add to costs and complications.

Some parents may simply feel uncomfortable about their adult children being involved in decisions concerning their retirement savings.

3. Challenge of paying parents’ super benefits: An intergenerational SMSF with a portfolio dominated by a single high-value asset – such as the family’s business premises – may struggle to pay the superannuation benefits of elderly parents when necessary.

Many SMSFs help deal with this challenge by paying retiring parents to superannuation pensions rather than lump sums.

4. Limit on SMSF membership: The four-member limit on SMSF membership is a hurdle for families with three or more adult children.

Peter Bobbin of Argyle Lawyers says some of his clients deal with the membership limit by having multiple intergenerational SMSFs within the same family. These are sometimes called “parallel” funds.

Under such an arrangement, parents are typically members of all of a family’s SMSFs with perhaps, depending upon the circumstances, two adult children in each fund. And the funds typically have a share in the same assets such as business premises.