Exploring SMSFs as a Family Wealth Strategy: Key Considerations and Opportunities
Self-Managed Super Funds (SMSFs) have become increasingly popular for those seeking control over their retirement savings. With over 600,000 SMSFs in Australia managing nearly $900 billion in assets, it’s clear that many Australians value the ability to make personalised investment decisions. Beyond individual and spousal arrangements, some families are exploring SMSFs to involve multiple generations in managing wealth, such as setting up superannuation balances for grandchildren. However, navigating the complex rules around SMSFs, including issues of control, trust deed requirements, and contributions, is essential to make this strategy work effectively and legally.
Establishing an SMSF Balance for a Grandchild: What You Need to Know
Recently, there has been increased interest from grandparents looking to establish super balances for their grandchildren through an SMSF. While this approach has potential benefits, it’s crucial to understand the legal requirements:
- Trustee Requirements Based on Age: If a grandchild is over 18, they are required to become a trustee or director of the SMSF’s corporate trustee. For those under 18, a parent or guardian must act as their representative until they reach adulthood. This structure adds complexity to the SMSF and should be carefully weighed against the specific goals of the grandparents.
- Control Considerations: When including additional family members, it’s essential to consider who holds control within the SMSF. Some SMSFs operate on a one-member, one-vote system, while others may use a balance-based voting power. To avoid disputes or unintended power dynamics, grandparents should review both the SMSF trust deed and corporate trustee constitution to understand how decisions will be made.
- Alternative Options: Given the complexity of including minors in SMSFs, grandparents may also consider establishing a super balance for grandchildren via a retail super fund, which can provide a simpler structure with fewer control issues.
Contribution Rules and Opportunities
Under SMSF rules, contributions for under-18s must follow specific guidelines, particularly when they relate to concessional (before-tax) and non-concessional (after-tax) contributions:
- Non-Concessional Contributions: Individuals under 18 can make non-concessional contributions. Additionally, they can use the “bring-forward” rule to contribute up to three years’ worth of contributions in a single year, effectively jumpstarting their super balance.
- Concessional Contributions: These can only be made if the under-18 individual is working or turns 18 before June 30. Once eligible for concessional contributions, individuals can utilize any unused cap from the past five years, provided they meet the eligibility threshold.
- Grandparent Contributions: Contributions made directly by grandparents to a grandchild’s SMSF are generally treated as concessional contributions. To avoid this, grandparents should consider gifting the amount to the grandchild, who can then make the contribution in their own name.
Understanding Your SMSF Trust Deed: The Fund’s “Rulebook”
Every SMSF operates under a trust deed, which sets out the fund’s governing rules. For example, the trust deed will dictate who can be a member, the types of benefits that can be paid, and the process for transferring control in cases of incapacity or death. Given the importance of the trust deed, it’s wise for SMSF members to review it periodically and ensure it aligns with any evolving family goals or legal obligations.
In addition to the trust deed, SMSF members should consider succession planning measures, such as binding death benefit nominations, reversionary pension nominations, and ensuring the deed allows for smooth transfer of control to the desired individuals. Without careful planning, family disputes, unexpected tax consequences, or even loss of fund compliance can occur, leaving intended beneficiaries without the intended benefits.
Seek Professional Advice
Given the complexities and potential risks of structuring an SMSF to include younger family members, seeking professional advice is highly recommended. A licensed financial adviser or SMSF specialist can help navigate the rules, review the trust deed for compliance, and guide the contributions process to meet the family’s objectives without compromising compliance.
In summary, SMSFs offer a powerful vehicle for managing retirement savings and even passing wealth between generations. However, when exploring strategies to include grandchildren in an SMSF, the importance of understanding legal requirements, contributions rules, and the fund’s trust deed cannot be overstated.
With tailored professional advice, SMSF members can create a robust plan that preserves family wealth and prepares the fund for a sustainable future. Contact us for guidance and to speak with a qualified financial adviser here.
Reference:
Disclaimer: Grimsey Pty Ltd ABN 65 051 642 838 | Grimsey Wealth Pty Ltd ABN 90 113 911 247 | Australian Credit Licence 293334 | Australian Financial Services Licence 293334
Grimsey Accounting NSW Pty Ltd ABN 39 001 918 814 | Grimsey Wealth NSW Pty Ltd ATF Grimsey NSW Holding Trust ABN 95 344 694 191
General Advice Warning: The advice provided is general advice only and does not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Liability limited by a scheme approved under Professional Standards Legislation.