Adding the Kids to your Super

How many times have you heard someone say if only I did that 20 years ago, imagine where I would be today. You can now put this wisdom to work by helping your adult children build a retirement you would be proud of.

With a self managed superannuation fund you can have up to 4 members which means you may be able to add all your super together in one fund to raise a significant deposit and at the same time have all the employer contributions of each family member go into that fund.

Let’s Meet the Jones Family; Paul is 45 and earning $75,000 as a storeman and has $98,000 in super with AMP, Annette is also 45 and works as a nurse earning $55,000 and has $45,000 in Super with Hesta. They have two kids Nathan who is 22 and is employed as an electrician who earns $44,000 and has accumulated $15,000 in his Australian Super Fund. And there is Claire who is 20 who is a receptionist earning $33,000 and has $12,000 in her Rest Superannuation Fund.

Between them they have accumulated $170,000 in super funds and their 9% employer contribution amounts to $18,630 per year.

They are very interested in purchasing an investment property as a family and have discussed setting up a Self Managed Superannuation Fund (SMSF) where they all will be members of the fund and directors of a trustee company. They will rollover their individual superannuation funds into the SMSF with the following member account balances, Paul $98,000 (58%), Annette $45,000 (26%), Nathan $15,000 (9%) and Claire $12,000 (7%).

They have will use $85,000 of the SMSF monies to pay a deposit on an investment property worth $425,000. They also establish the appropriate legal structure and documentation to allow the SMSF to borrow $340,000 from a bank.

After collecting the rent and paying the interest on the mortgage and the running costs of the fund and property the SMSF will still have over $10,000 excess cash every year to either pay down the debt or accumulate funds for another investment. After 20 years and given that the property grows by an average of 6% per year, the property alone will be worth $1,363,033 in addition to this the SMSF may have accumulated other investments.

As with any super member accounts are kept separate, which allows clear identification of account balances for every individual. But the only difference here is that the family has total control of their superannuation investments and together they work as one and boost their super.

Now you might be thinking " can I do this with friends or other family members?"

The anwer is YES.

Let me know what your thoughts are on this strategy.

Or visit our website at cr.com.au

 

Good strategy.

Let's continue the story with a few different scenarios.

1/ A couple years pass, and young Nathan finds the love of his life... Helen. Nathan's income is growing nicely, and he and Helen have a child. A few more years go by and the cracks begin to appear. After 6 months of unsuccessful counselling, the couple sadly decide to part ways. In time, the family court determines that a 60% split of assets has to occur (this, of course, includes super) and the trustees, including Paul and Annette, must now make provisions to make the payment. Do they have enough in liquid assets? Do they borrow to fund the withdrawal? Do they sell the house & and is the market appropriate to do this?

2/ After purchasing the property, Paul has an unfortunate accident and sadly dies. The life insurance which was attached to the AMP is long gone (remember he rolled over to the SMSF). Let's hope the right advice was given regarding setting up the SMSF with attached life/tpd insurances. Now the remaining trustees need to pay out a death benefit (by way of lump-sum or pension). Do they have enough in liquid assets? Do they borrow to fund the withdrawal? Do they sell the house & and is the market appropriate to do this?

3/ Claire is growing up, and starts to take an interest in markets and wants to take a more 'active' role in managing her own super. She's either a direct trustee or a director of the trustee company - so she, at worst, has a vote on the issue, right? She disagrees with mum & dad's strategy and strongly wants to consider investing in ethical funds. Not making any headwinds with the other trustees/directors, she decides she wants to roll-out into her own super fund. Do they have enough in liquid assets? Do they borrow to fund the withdrawal? Do they sell the house & and is the market appropriate to do this?

In summary, I have no problem with SMSFs - nor borrowing to invest in property. For the right person/people ONLY. I am not a doomsdayer on property, but I genuinely believe that many Australians are significantly overweight in property already - further borrowing via SMSF does not address or fix this. Liquidity is my major concern, not the potential upside.

I'm sure that the company above is reputable - in fact their credentials look good. But I'm always wary when I see the phrases like "turbo charge your super" and "treasure chest of strategies". As always when making a major investment decision, DYOR (do you own research), seek advice and think "risk" before "return".

 

Yes David, I agree with you 100%, Do your own research. But the problem with most people is that they don't know that such strategies are available. The first step is to make people aware of the strategies and some times using such woods as "turbo charging your super" does create an interest and gets the message out there, then more research and advise can be obtained to ensure the strategies are appropriate for them.

But it at least provide people with information so that they can become aware of the options and possibilities that most professionals seem to keep to themselves or do not want to venture down.

Phil

 

Hey guys - some good information in there by Phil & David - congrats on highlighting both the good and bad of multi-generation SMSFs.

As this area is something I advise on day to day, I would like to expand and also provide some practical solutions or even commentary on some of the issues raised.

Issue 1: Dealing with divorce

Divorce is always messy, but there are a few strategies our happy family could put in place is minimise the impact:

• Don't gear too heavily into property. By not investing close to 100% of the liquid assets of the fund into property, other liquid assets (shares / cash) can be available if a members benefit needs to be transferred out of the fund
• The family court has the ability to balance things out. In situations where a property held in super is used in the family business, the terms of the separation may enable the spouse of the member to take more assets outside of super to compensate for a smaller slice (or no slice) of what the member has inside the SMSF.
• As it is a liquidity issue, it is possible to simultaneously transfer one member out of the SMSF while transferring another member (maybe adult child #3?) into the SMSF. The injection of funds from the member coming is can pay the rollover of the member going out (or the transfer out of funds to the ex-spouse). Now you can't have 5 members with a SMSF or it will no longer meet the definition of a SMSF and lose all the wonderful tax concessions. Some clever administration would be required to ensure that wouldn't happen.

Issue 2: Death

Death. Almost as messy as divorce:

• Insurance is absolutely critical when it comes to SMSF borrowing to buy property. Common sense right? The insurance proceeds from the death or disablement of a member can provide liquidity and pay a lump sum to that members beneficiaries right?
  Well, yes and no - often it doesn't solve the problem. Let's use continue with Phil's example. Paul has 58% of the property. Let's assume when he dies, the property is worth $500k and the loan is still $340k (interest only for now) meaning he has a 58% or $92,800 share or member interest.
  If there was a $200k life insurance policy held by the SMSF on Paul's life which was paid out, that would actually increase his member interest to $292,800 - so it wouldn't solve the problem as to pay out $293k rather than $93k still leaves us with selling the property as the only real option. The reason why the SMSF must add the life insurance proceeds to the member benefit is because the ATO says when the premiums for an insurance policy are allocated against a specific member interest, then the proceeds of that policy must also be allocated against that same member interest (account) within the fund. Guess what the overwhelming majority of accountants who prepare SMSF accounts do with the premiums? That's right - they allocate it against the members account. Not a good idea when borrowing within a SMSF. If the insurance is treated correctly, it could be used to pay out Paul's death benefit of $93k and enable the property to stay in the fund.
• Where the deceased person has a surviving spouse (in Paul's case this would be Annette) payment of a death benefit may not be as much of an issue as the surviving spouse can receive the 'death benefit' as a pension rather than a lump sum. There still may be some liquidity / cash flow issues however if the excess cash generated from the property and from other sources (9% SGC from the younger contributing members) is not enough to fund a pension that will replace Paul's income (which Annette may still need a portion of to cover house repayments etc)
• If some funds were left by Paul in his old AMP fund, keeping whatever insurance was in there as being active, if the proceeds were paid out to Annette upon Paul's demise, then she could also re-contribute those funds as a (personal non-concessional) contribution into the SMSF, and use the cash that would then be there to pay a lump sum to herself.
• Goes to show the important of not just insurance but also good advice to go with it.

Issue 3: Differing Investment Strategies / Philosophies

• This is not just a generational (accumulator vs pensioner) issue as you can have a couple who are the same age with very different appetites for risk and hence will want to invest in different type of assets.
• Having a younger member who wants to investment in different types of assets may not be issue if they have a smaller account balance within the fund. Cash be freed up by having the SMSF loan as interest only (most lenders who offer limited recourse loans offer an interest only period which is good as you cannot redraw on a limited recourse loan like you can with a regular property loan). Also not gearing too highly as previously mentioned can keep some liquid funds available.
• Using a segregated investment strategy (rather than a pooled strategy) is absolutely essential when you have different generations within the same fund who want to go in different directions with their investment decisions. It enables flexibility while at the same time members can share the costs of running a SMSF - the members just have to set down the ground rules of how it will all work right from the start.

If anyone requires any clarification on the above, please respond and I will endeavour to answer your questions.

Kris

p.s. Turbo charge your super!

 

Excellent!