Adding the children
One of the most common questions we receive from SMSF trustees is whether their children should become members and trustees of the family SMSF.
While there can be some benefits to having children as members of an SMSF, we have also seen a number of compliance, succession planning and asset protection issues arise over the years.
In many cases, adding children to an SMSF may not be the most suitable option. However, every family’s circumstances are different, and it is important to understand both the advantages and disadvantages before making a decision.
Potential Advantages of Adding Children to an SMSF
1. Lower Costs Per Member
An SMSF can have up to six members. Because many administration and audit costs are fixed, adding additional members can reduce the overall cost per member.
2. Larger Combined Superannuation Balance
When children join the fund, their superannuation balances become part of the SMSF. A larger balance may provide access to investment opportunities that require a higher level of capital, such as direct property investments.
3. Continuity of the Fund
If parents pass away, the SMSF may be able to continue operating with the remaining members. This can reduce the need for an immediate wind-up of the fund and may assist with long-term succession planning.
4. Financial Education
Being involved in an SMSF can help younger family members gain a better understanding of investing, retirement planning and trustee responsibilities from an early age.
Potential Disadvantages of Adding Children to an SMSF
1. Increased Compliance Risks
As members and trustees, children have legal access to the SMSF’s assets and bank accounts. Any unauthorised withdrawals or breaches of the superannuation rules could place the fund’s complying status at risk and potentially lead to significant penalties.
2. Family Law Risks
In the event of a relationship breakdown or divorce, SMSF interests may become relevant in family law proceedings. This can expose the fund and its assets to additional legal complexities.
3. Loss of Control Over Death Benefits
As children become trustees, they may have influence over how death benefits are administered and paid. Depending on the structure of the fund and the documentation in place, this may not always align with the parents’ wishes.
4. Trustee Responsibilities Can Be Difficult to Manage
Trustees must actively participate in managing the SMSF and sign important documents such as annual financial statements, tax returns, trustee resolutions and meeting minutes.
If children live interstate or overseas, meeting these obligations and participating in fund management can become more challenging.
Is It the Right Decision?
Adding children to an SMSF can provide benefits in certain situations, particularly where families are looking to pool superannuation balances or establish a long-term family wealth strategy.
However, trustees should carefully consider the compliance, control and succession planning implications before making any changes to the fund structure.
Professional advice should always be obtained to ensure the arrangement aligns with your family’s objectives and complies with SMSF regulations.
Need Help Adding Children to Your SMSF?
If you decide that adding your children to your SMSF is the right option, iCare Super can assist with the entire process, including trust deed updates, trustee consent and delclaration form, membership application, ASIC & ATO changes, rollover and compliance requirements.
For more information, visit: Adding a New Member
Disclaimer
This article contains general information only and does not take into account your personal objectives, financial situation or needs. The information provided should not be relied upon as financial, legal, taxation or superannuation advice.
The suitability of adding children as members and trustees of an SMSF will depend on your individual circumstances, including your family structure, succession planning objectives, asset protection considerations and retirement goals. Before making any decision regarding your SMSF, you should seek independent professional advice from a suitably qualified financial adviser, accountant and/or legal practitioner.
While every effort has been made to ensure the accuracy of the information at the date of publication, SMSF legislation and regulatory requirements may change. iCare Super does not accept liability for any loss or damage arising from reliance on the information contained in this article.