Adult son in SMSF

Hi
I am 56 and have super via retail funds. Same with my wife. Both funds are large to justify SMSF cost. I like to control my super and hence SMSF and I will start to have time. I have a history of managing well.

Question is this - my son is married and well settled. There is great deal of trust. When I set up the smsf, does it make sense to have him and his wife in the fund or out of. Do they or we loose any freedom? Can we be very clear whose money is where?

Any ideas/experiences will be very helpful. Thanks in advance.

 

Hi Dissed,

What you are proposing is entirely possible and has many advantages, but some challenges you need to be aware of.

Some advantages include:

• Slightly lower overall MER (management expense ratio) as the fixed administration and audit costs are spread across 4 members rather than just two
• You have a trustworthy person who can act on your behalf if anything happens to you and/or your wife
• You can build up reserves which are not allocated to any specific member which can assist inter-generational wealth transfer
• Your son (and his wife...) can enjoy the flexibility and control of the SMSF while only paying a portion of the ongoing costs
• If you and your wife intend to travel overseas for an extended period when retired, you have an active (contributing) Australian resident member to control the fund and ensure the fund remains an Australian SMSF and complying
• You can combine monies to assist the younger members buy investments such as property
• Using some fancy accounting techniques (segregation within the SMSF) if a younger accumulation member has an asset with a large capital gain, that asset can be switched across the the pension members side and be sold with 0% tax

However there are some serious downsides which need to be taken into consideration before getting started:

• A SMSF is limited to 4 members - if you have other children they might feel excluded which could create friction within the family.
• If your son divorces you and your family SMSF could be dragged into a messy property settlement
• You need to ensure your voting rights are structured correct (i.e. 1 vote per person, or 1 vote per $1 of your member balance) so that the wrong person ends up in control of your SMSF (especially when you die or loose capacity).
• You need to manage different investment strategies for members at different stages of their lives - which can be challenging if not set up correctly
• Tax time can be tricky if you have pension members receiving refunds of franking credits while the accumulation members have tax payable from concessional contributions - who gets / pays what?
• You may incur additional costs if you inter-mingle all the investments - especially when pensions come into play

From my experience, setting up multiple generations within the same SMSF can work, however the younger members will tend to move their monies / investments across to their own SMSF once they have sufficient monies to justify it.

All of the above downsides I have listed above can be easily overcome.

This is how I would structure your SMSF

1. Use a corporate trustee (you should always use a corporate trustee) - all four members will be directors
2. Use a good quality trust deed
3. Make your voting rights based on the dollar balances of the member accounts rather than 1 vote - ensure you and your wife keep control
4. Segregate your assets - this means you and your wife will have different SMSF bank accounts and investments that your son and his wife
5. Have two different investment strategies and give you son and his wife control over their own investments
6. Commence a transition to retirement pension for yourself (you mention you are 56) and also your wife if she is over 55
7. Ensure you can obtain appropriate replacement insurance cover before transferring / rolling over any super monies from your existing retail funds - or leave enough in the respective retail funds to keep the insurance going (i.e. only do a partial rollover) - this is more relevant for the older members
8. Find a great SMSF accountant and adviser who knows how to handle segregated investment strategies

There are probably some other issues to cover - but I think I have covered the main ones.

I hope the above answers your questions, if you require further information or clarification please let me know.

SM

 

Thank SM

This is great and it is in a language I can understand. Funny how my planner never thought of it himself.

Now back with my family to discuss. I will get back if there are any followup questions.

Thanks a million. Very useful.