Previously families with more than four family members were limited from having the entire family in the one Self-Managed Superannuation Fund (SMSF). However, this has now changed, from 1 July 2021, the maximum number of members has now increased from four to six members.

Therefore, if you had previously considered adding your adult children to your SMSF, but were limited, now might be the time, there are some advantages in doing so.

Five Advantages of adding adult children to your SMSF:

  1. Administrative costs - Previously if families larger than four wanted to have all the members in an SMSF, the only option was to create two SMSFs. This incurs extra costs and administration. This is no longer the case up to six member families.
  2. Family decisions & Education - With a six-member fund, more families can have the opportunity to make joint investment decisions within the one SMSF environment. It also provides an opportunity to engage all family members and pass on the knowledge and skills from creating or maintaining superannuation wealth to the next generation.
  3. Pooling funds - Greater purchasing power comes with pooling funds of the family to purchase assets that they might not have otherwise been able to be purchased and diversifying the assets held within the SMSF. In situations where parents are unable to make further contributions due to age or the $1.6 million cap, younger members are able to make further contributions. If a member of the fund is running a business, the family holding a commercial property in the SMSF is able to lease it back to a business, utilising the tax effectiveness available in an SMSF environment.
  4. Asset protection - Assets held in a superannuation fund are protected from creditors in the event of a member's bankruptcy.
  5. Estate planning - Superannuation death benefits do not automatically form part of an estate. Members can protect their rights by appointing a legal personal representative becoming trustee or director upon a member's death. They can also consider a reversionary pension or making a binding death benefit nomination to qualifying dependents and/or your legal personal representative. Careful drafting and wording must be undertaken to ensure validity and compliance with the SMSF trust deed and superannuation law. It is possible for death benefits to be paid as a pension to a death benefits dependant rather than a lump sum, which extends the lifespan of the SMSF. Parents are also able to withdraw a pension from the SMSF and gift it to their children. The children in turn are able to recontribute it to the fund as a member in their own name and within contribution limits.

Family business property can also remain in an SMSF even after the death of a member of the fund.
It is also important to note that there are some matters to consider before deciding to add your children to the SMSF.

  • Review of trust deed - ensuring that the fund's trust deed is able to cater for increase in member numbers and binding death benefit nominations.
  • Ensuring all family members are on the same page - understanding the purpose of the SMSF, wealth and responsibilities required with being a member. Generally all members of a SMSF with legal capacity must be trustees of the fund or directors of the corporate trustee. Children under 18 can be a member of the fund however a guardian needs to act in their place.
  • Investment decisions within a fund - Parents and children in different generations might have a different investment outlook and risk appetite. Therefore work will need to go into developing an investment strategy that meets everyone's requirements.
  • Control and management of the fund - just like having board members in a company, the more members in the fund the greater the potential for disputes. There might also be difficulty removing members of the SMSF once they have been appointed in the event of a relationship breakdown or it might result in a forced sale of assets to allow the member to exit. Generally each trustee also has one vote when it comes to voting rights, however depending on the constitution and deed, it could be possible to have voting rights based on member balances or other methods.

Self-Managed Superannuation is an inherently complex area. Moore Australia has access to specialist superannuation tax experts and licensed financial advisors.

This article is issued as general commentary - please contact us about your specific circumstances.