In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
In the last few years, I’ve found myself pondering whether or not my children should come into my SMSF. They could – both my sons are adults, are engaged with their super and more than capable of learning how to share the management of an SMSF. We’re also a small enough family that we can all fit in together under the ‘maximum of 6 members’ rule.
In some ways it would be nice to bring them in to my existing fund. They’ve both had that slightly shocking experience that many 20-somethings have where their small contribution amounts are decimated by fees, even though they both belong to well-regarded industry funds.
And when I explained Government Co-contributions and the First Home Super Saver Scheme they actually added some of their own money. (Well, OK, let’s be honest, I gave them some money to put in and they did.) But even a lot of that disappeared in fees. There’s no doubt that it would be cheaper for them to belong to my fund than stay where they are.
What I'm not concerned about
I’m not worried about them having too much knowledge of my financial affairs. We’re a ridiculously transparent family when it comes to money and always have been (less so about budding romances and speeding tickets as I discovered on a recent holiday but … that’s probably not critical in this question of whether or not they join my SMSF).
Initially I wondered if deep down I was put off because they would be able to outvote me even though most of the fund would be my balance. Of course, there are ways to control that if they agree to it.
For example, I could continue to own the shares in the trustee company. That’s because there are rules saying that (roughly) “generally speaking, all members have to be directors of the trustee company” but there are no rules at all about who owns the shares in the company itself. Given that most company constitutions give ultimate power to hire and fire directors to the shareholders, hanging on to the shares does mean I keep a lot of control.
In fact, in our case, I could even continue to be the sole director of the trustee company because we all hold enduring powers of attorney for each other. Specifically, the fact that I have an enduring power of attorney for each of them means that I could be the sole director even if they were both members.
But to be honest I don’t like that approach. There will be some useful learnings for them if they’re participants rather than observers. It also feels a bit patronising – they’re adults, they should have a direct say in how their SMSF is managed.
So that wasn’t it.
A three-person fund would be slightly harder for my financial adviser I imagine as he would need to consider the fund’s investments in terms of their appropriateness for people with very different timeframes. As I keep reminding both my adviser and my children, I am way too young for retirement but even I would have to admit that I’m closer than my children are.
I don’t think my adviser or my Heffron team (who do the accounting work for the fund) would be too concerned about the administrative hassle of having more trustees who don’t live together to sign things like investment strategies, annual returns etc. – digital signing makes that incredibly easy these days.
That wasn’t it either.
Circumstances can change too
I doubt the arrangement would last forever. I hope my boys are lucky enough to have whatever families they want themselves in the future. That will probably mean they move to their own SMSF one day. But the fact that something won’t last forever doesn’t mean it won’t add value for the next 10-15 years. It’s just something we should consider up front. For example, it might not make sense to invest in anything that tied up their balances too much – we’d need to be sure they could get out when they wanted to. (This is the sort of thing ASIC and the ATO mean when they talk about the importance of having an exit strategy. What sorts of things might cause some of the members to leave or even trigger the fund being wound up? Can we plan for them in any meaningful way?)
Often people join forces with their children in an SMSF to genuinely invest together in an asset neither party could afford to buy solo. That’s not a consideration in my case – my investments are very boring and even if my sons were to join the fund, I can’t see that changing any time soon. Others value the great cash flow management afforded by having multiple generations in the same fund. The cash flow coming in via contributions from the kids’ generation funds pension payments to the older generation, leaving the investments to keep growing undisturbed. That’s probably a little too far in the future for me to be worrying about yet.
Of course, all of this assumes we continue to be just as aligned as we are right now. I hate to even imagine it but there’s always the possibility that we have a major falling out. A new spouse (for any or all of us) could change the dynamics enormously – pretty much everyone who advises clients on their finances has a war story along these lines.
So, I’d need to check my trust deed to make sure it deals with disputes appropriately. And much as I would love to say that we can put watertight provisions in place to solve every problem, the fact is it’s never possible. Even the controls I touched on earlier (hanging on to the shares in the corporate trustee or even being the sole director) only go so far. I won’t be able to unilaterally expel one or both of them from ‘my’ SMSF at some point just because they start sizing me up for a nursing home earlier than I want. As members, they would need to initiate any rollover, I can’t just choose a new fund for them. So even ending everything will require good faith dealings on all sides.
My decision
As I thought about it more for the purposes of writing this article, I concluded that the main driver for including my children in my SMSF would be to save them fees and give them the kind of freedom and control I enjoy with my SMSF at a bargain price. It would set them up to be confident in having their own one day. And I think the thing that’s stopping me is that it would just be less convenient for me. At the moment, decision making is easy – my adviser emails me, I respond, and things happen. I can’t be bothered nagging my young adults who are both busy with their own lives to sign things. Perhaps I’m not the wonderful mother I thought I was after all.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
For more articles and papers from Heffron, please click here.