Self-managed super funds (SMSFs) can offer their members many benefits, but one that’s often overlooked is their potential as a multigenerational wealth creation and transfer vehicle.

Family SMSFs are relatively rare. According to the most recent ATO statistics (2022-23), the majority of SMSFs (93.2 per cent) have only one or two members. ⁱ  Just 6.6 per cent have three or four members, and only 0.3 per cent have five or six members (the maximum allowed).

Advantages of a family SMSF

An SMSF is sometimes established when two or more generations of a family share ownership or work in a family business. The fund can then form part of a personal and business succession plan, potentially making it easier to pass on ownership and management of assets to the next generation.

With more members, SMSFs also gain additional scale, allowing them to invest in larger assets, such as property. You can add business premises to the SMSF and lease it back without violating the related parties rule and 5 per cent limit on in-house assets. ⁱⁱ

Reduced tax and administration costs are also benefits of multigenerational funds.

Running a family SMSF means the costs of establishing and administering the fund are spread across more members. This can be particularly helpful for adult children who are beginning to save for retirement.

In addition, more fund members mean more people to share the administrative burdens of running an SMSF, which may be helpful as you get older

A family SMSF does not need to be automatically wound up if you die or lose mental capacity, and it can simplify the process of paying out a member’s death benefit, potentially allowing it to be paid tax-effectively. Note that death benefits paid to non-tax dependent beneficiaries incur a tax rate of up to 30 per cent, plus the Medicare levy. ⁱⁱⁱ

More fund members also make setting up a limited recourse borrowing arrangement (LRBA) easier because their contributions reduce the fund’s risk of being unable to pay the borrowing costs. (An LRBA allows an SMSF to borrow money to buy assets).

Funding pension payments

Another advantage of an SMSF with up to six members arises when the fund begins making pension payments to older members.

If younger members are still making regular contributions, fund assets don’t need to be sold to make pension payments, which helps avoid the realisation of capital gains on assets.

Family SMSFs can also provide non-financial benefits by facilitating the transfer of financial knowledge and expertise between generations. While your children gain a solid financial education from participating in the management of the SMSF, they can also offer valuable investment insights from a different perspective.

Risks and responsibilities

It is important to note that a multigenerational SMSF may not be suitable for everyone.

SMSFs of any size come with certain risks and responsibilities. You are personally liable for the fund’s decisions, even if you act on the advice of a professional, and your investments may not yield the returns you were hoping for.

Before you start adding your children and their spouses to your fund, it’s essential to consider the challenges of running a family SMSF. Developing an asset allocation strategy that caters to different life stages can be complex. Older members may prefer a strategy designed to deliver a consistent income stream, while younger members are typically more focused on capital growth.

Risk profiles are also likely to vary. Generally, younger fund members have a higher appetite for investment risk than those closer to retirement.

Family conflict can also arise when relationships are strained due to divorce, blended families, and personality clashes.

The death of a parent can also create disputes over the distribution of fund assets or forced asset sales. Decisions about the payment of death benefits by the remaining trustees can derail carefully made estate plans and result in expensive legal battles.

Larger families with multiple adult children and partners may also find the six member limit an obstacle, forcing them to look at other options such as running several family SMSFs in parallel.

The process of choosing the best approach for a self-managed superannuation fund depends on your financial situation and goals,

Whether you’re already working with us or just starting to explore your options, we’re here to help. If you’re an existing client, reach out to your adviser to discuss your next steps. If you’re new and looking for guidance, our experienced advisers are ready to answer your questions and help you take the first step toward achieving your financial goals.

Let’s start the conversation today.

Sources

 i SMSF quarterly statistical report June 2024 | data.gov.au

ii Related parties and relatives | Australian Taxation Office

iii Paying superannuation death benefits | Australian Taxation Office

What happens to a Self-Managed Super Fund (SMSF) when a trustee dies or becomes mentally impaired? While these are circumstances that many of us would rather not think about, spending some time planning now could make a significant difference for you and your family in the future.

Australia’s 620,000 SMSFs hold an estimated $933 billion in assets, so there is a lot at stake. ^I

But it’s not just about money; control of the SMSF is also important.

The best way to ensure that your wishes are carried out is with a properly documented succession plan and an up-to-date trust deed.

An SMSF succession plan sets out what will happen if you or another trustee dies or loses mental capacity. It ensures a smooth transition and is separate from your will.

It’s important to be aware that instructions in a will are not binding on SMSF trustees. Therefore, it’s essential to have a valid (preferably non-lapsing) binding death benefit nomination in place so the new trustees are required to pay your death benefit to your nominated beneficiary.

Your will cannot determine who takes control of your SMSF or who receives your super death benefit, as the fund’s trust deed and super law take precedence. ⁱⁱ

Succession plans also reduce the potential for the fund to become non-compliant due to overlooked reporting or compliance obligations. They can even provide opportunities for death benefits to be paid tax-effectively. ⁱⁱⁱ

Selecting successor trustees

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so it’s important to consider what will happen after the death or mental incapacity of one of the trustees.

An alternative to appointing a successor trustee is introducing a sole-purpose corporate trustee structure for your SMSF, as death or incapacity then does not pose an issue. This structure makes it easier to keep the SMSF functioning and fully compliant when a trustee transition is required. ^iv

Appoint a power of attorney

SMSF succession planning also means ensuring that your will is updated to reflect your current family or personal circumstances.

It requires having a valid Enduring Power of Attorney (EPOA) in place to help keep the SMSF operating smoothly if you lose mental capacity. Your EPOA can step in as a fund trustee and take over administration of the fund or make necessary decisions about the fund’s investment assets.

Checking compliance

When reviewing or creating a succession plan, it’s essential to ensure your wishes are fully compliant with the SIS Act and do not inadvertently compromise your SMSF’s compliance status. This should be part of your regular reviews with your adviser, who can ensure your trust deed, the SMSF’s circumstances, and the ever-evolving super legislation are all in sync.

Tax is an important consideration in estate and succession planning, as super and tax laws use different definitions for who is and isn’t considered a dependant.

Your SMSF can pay super death benefits to both your dependants and non-dependants, but the subsequent tax bills vary based on the beneficiary’s dependency status under tax law.

Problems that can arise due to the differences between super and tax law dependency definitions were highlighted in recent private advice (1052187560814) provided by the ATO. It found that even if a beneficiary was receiving “a reasonable degree of financial support” from a deceased person just before they died, they would not necessarily be considered a death benefit dependant under tax law.

There is also the potential for capital gains tax to be payable if fund assets need to be sold because your super pension ceases when you die. Nominating a reversionary beneficiary for your pension ensures payments continue automatically without requiring any asset sales. ^v

Inadequate planning can have far-reaching implications, impacting not only your assets but also your loved ones and their future. If you would like to discuss or require assistance with drawing up your SMSF succession plan, contact one of our financial advisers today.

Sources

i https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/smsf-newsroom/highlights-smsf-quarterly-statistical-report-march-2024
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-benefits/death-of-a-member
iii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/administering-and-reporting/how-we-help-and-regulate-smsfs/how-we-deal-with-non-compliance
iv https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/setting-up-an-smsf/choose-individual-trustees-or-a-corporate-trustee
v https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/in-detail/smsf-resources/smsf-technical-funds/funds-starting-and-stopping-a-pension