key takeaways
For the majority of our clients, the clients themselves (usually husband and wife, parents) are the only members of their self-managed superannuation fund (SMSF). Under the current superannuation rules, you can have up to six members of an SMSF.
Practically though, we only have a handful of current clients with SMSFs with more than two members and very few enquiries about increasing the number of members to six. Why is that?
why would i add my child to my smsf?
From our experience, some reasons parents add their child or children to a SMSF include:
funding
Where the trustees are looking to purchase real property or shares, they may have insufficient funds to make the purchase.
The trustees may consider adding their child to the SMSF and rolling the child’s member funds into the SMSF from a public offer fund as an alternative to borrowing money from a bank or related party as part of a limited recourse borrowing arrangement.
In short, the more members, the more buying power.
teaching
Some people learn best by doing. While parents are alive and able, they want to add their child or children to the Fund so they can give them practical experience in operating an SMSF and managing wealth.
succession
From an estate planning perspective, clients encounter some difficulty where an SMSF owns a lumpy asset (e.g. commonly commercial property or business real property where the clients operate their business).
If a member dies, a death benefit needs to be paid (i.e. money has to come out of the Fund). If there are not enough liquid (non-lumpy) assets to pay the death benefit, then some or all of the lumpy asset needs to come out of the Fund to pay the death benefit. This will likely have tax and duty consequences.
One option to avoid this situation is to add a child to the Fund and roll their member balance (usually cash) into the Fund. That cash can be used to pay the death benefit. This allows the lumpy asset to remain in the Fund.
i want to add my child to my smsf - what do i need to consideR?
Before adding children to the SMSF, trustees should consider the following:
adding a child as a trustee
Under the superannuation laws, each member needs to be a trustee (or director where there is a corporate trustee). All trustees will be liable for all actions of themselves and the other trustees. This includes the parents being liable for any breaches by the child. The child will also have access to all information about member balances and the Fund generally.
decison-making
The child will be involved in all decision-making for the Fund (as under most trust deeds, all trustees must act jointly). This can be modified to limit the voting rights of members. For example, to vote according to account balances, but the children will still be involved in that process. There are pros and cons to this for the various parties (e.g. the parents could remain in control) but the child may feel locked out.
disputes
Trustees (parents) need to anticipate that, whilst they have a good relationship with their child or children now, this may change in the future, and the child might wish to leave the Fund.
From our experience, the greatest point of conflict is when parents and children are in the same fund, and the child wants to roll out of the Fund but cannot because their member balance is tied up in a lumpy asset (e.g. real property).
control after death
If a parent and child remain in an SMSF and the parent dies, in the absence of a binding death benefit nomination, the child is left in control of the Fund. That child controls the way in which the parent’s death benefit is paid and can determine to pay the parent’s death benefit to themselves. This might not be appropriate where there are other children who ought to receive part of the benefit.
You can argue that the child (as trustee) owes fiduciary duties and must act appropriately when making a determination about the payment of the death benefit (and not simply prefer themselves over their siblings), but to enforce this requires costly litigation. This can be remedied through all members having a binding death benefit nomination and only adding children to the Fund who are responsible and trustworthy.
conclusion
Before admitting a child or children to the Fund, parents should consider all the implications including those listed above. If you require assistance, please contact us.
The Estate Planning, Superannuation and Structuring team at McInnes Wilson Lawyers. Lawyers are people, too (mostly). So you know who we are, below is some information on the team:
Neal Dallas, Principal
Neal has extensive experience advising clients in the areas of superannuation, tax, estate planning and asset protection. He is recognised in the 2022 Edition of Best Lawyers in Australia in the areas of Superannuation Law, Tax Law, Trusts and Estates and Wealth Management/Succession Planning Practice.
Victoria Mercer, Associate
Victoria assists private clients and their advisors across a range of estate planning, superannuation and structuring issues. She has a particular focus in providing advice on complex estate planning and structuring matters, asset protection and superannuation issues. Victoria has completed several modules of the Graduate Diploma of Applied Tax course.
Emily Ryan, Graduate
Emily is a promising graduate with a strong interest in estate planning, superannuation and taxation. Following the completion of her Bachelor of Laws with the Queensland University of Technology, Emily is completing her Supervised Workplace Training program (in accordance with the Queensland Law Society guidelines) and commenced her Graduate Diploma of Applied Tax course.
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