I am often asked the question, can or should my adult children be members of my self-managed superannuation fund (SMSF)? In practice there is no hard and fast rule when it comes to including children.
One of the limitations of as self- managed superannuation fund is that there can be no more than four members. By comparison a family trust can have an infinite number of beneficiaries but can only exist for a maximum of eighty years. On the other hand an SMSF can, in theory, continue for ever.
As family farms increase in scale there is often more than four people involved particularly where two generations and in-laws operate the family farm. Estate planning can be difficult when significant assets are held by a SMSF and there are more than four in the family.
Risk profiles can also vary widely with the generation gap. Typically those who are younger tend to have a higher appetite for risk compared to those nearing retirement. Members of superannuation funds over 65 will invariably draw superannuation pensions which increase at the ages of 75, 80, 85, 90 and so on, thus requiring a certain level of cash available within the fund. Conversely, younger members are more inclined to invest for capital growth and may decide to enter into borrowing arrangements within the fund. Nevertheless having younger members contributing cash to the fund can be very helpful in meeting the cash requirements of pension draw downs.
One solution to the problem with being restricted to a maximum of four members is to have two or more self-managed superannuation funds. Having more than one SMSF will facilitate the separation of farming assets and non -farming assets within the SMSFs. This can be particularly useful where there are farming and non- farming children who will eventually benefit from these investments. It can also be useful when catering for the different investment strategies required by older and younger members of superannuation funds. Further reasons for having more than one SMSF could be where the family has split or where there are blended families involved.
Let us assume there are six adults involved in the family farm and they wish to use their accumulated external and internal superannuation benefits to buy more farming land. In this scenario, a second SMSF could be established and the two funds can own the land as tenants in common. A further extension of this example could be where the younger members of the second SMSF decide to incorporate borrowings within their fund to buy some of the land. This would require high level professional advice and may even depend on the title particulars of the land being acquired.
Another reason to use more than one SMSF could be where a family decides to purchase non farming land using a SMSF. By having more than one SMSF owning separate parcels of real estate there is a high likelihood of minimising land tax which can be a significant annual expense.
The pooling of superannuation benefits within a SMSF usually reduces the costs of administration. However, there will obviously be additional costs incurred and time spent in operating two or more self -managed superannuation funds. Therefore a cost benefit analysis needs to be undertaken before establishing additional funds.
Including a child or children in your SMSF can be a successful plan but you need to be aware of the pitfalls. At the same time, placing all of your investments in one superannuation fund may save you administration costs, but cost you much more because of the flexibility of having many more options with more than one SMSF.
This information is not intended to constitute advice.