Why parents may start including kids in SMSF


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Only about 10% of self-managed super funds (SMSF) have more than two members.

It seems fair to assume most parents who have a self-managed superannuation fund don't include their children as members.

But Macquarie Bank group analytics research manager Gary Lembit thinks more parents may soon start doing so.

This, he says, is suggested by research Macquarie recently carried out for the SMSF Professionals Association of Australia (SPAA) which found a lot of young people were interested in SMSFs and the possibility of joining their parents' funds.

The obvious issue is whether or not such a development would be sensible. Before examining the case against including children in a SMSF, let's have a look at the reasons why it can make sense to include them.

One is the fact that including children in the fund should result, over time, in the fund having a bigger pool of assets, allowing for greater diversification and the option of acquiring more expensive assets, such as a business property.

As an added benefit, a larger fund should result in costs being kept down as a percentage of the total value of the fund.

Involving your children in your SMSF also helps them to become engaged with superannuation and value it as a way of building wealth for the future.

SPAA technical director Graeme Colley says an important motive for including children is to establish an SMSF as a multi-generational fund - one that continues after parents, children and even grandchildren have died.

This can be particularly useful if you want to keep a business property controlled by the same family.

The strategy is possible with SMSFs since, while they are legally trusts under section 343 of the Superannuation Industry (Supervision) legislation, they are specifically exempt from the law that prevents a trust from extending beyond 80 years.

What, now, of the reasons for not including your children in your SMSF?

For those with more than two children, the most obvious barrier is that a self-managed fund can't have more than four members.

The only way around this is to run two or more funds in parallel, which will cover the whole family - but with the obvious downside of being administratively messy. Colley also warns that, even where two funds aren't required, including children in your SMSF can add to administrative complexity, especially when some members start receiving a pension while others are still in the accumulation phase.

He also points to the potential problems that can arise should you divorce.

There could also be problems for your estate when you die if your children (and perhaps their partners) disagree about what should happen to your super.

The most fundamental issue of all is that including your in the fund children can result in you losing control of your SMSF, especially if your spouse dies.

Colley says one strategy for dealing with this involves including differential voting rights in the SMSF trust deed, usually as a way of ensuring voting rights are based on a member's fund balance.

Super tip

At the last minute the federal government decided against introducing rules banning off-market share transfers to SMSFs.

Such transfers appeal because they can usually be done without incurring brokerage, a concession that can generate a significant saving when a member wants to use a large portfolio of shares to make an in specie contribution to their SMSF.

Remember, listed securities acquired by an SMSF at market value are exempt from the ban on super funds acquiring assets from a member.

While a transfer of issuer-sponsored shares shouldn't incur any brokerage, the situation is less clear with CHESS-sponsored shares.

Check with your broker. If there is a charge, you can shift to issuer sponsorship before transferring.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.