Mixing money with family can be a recipe for disaster. But there are benefits in adding children to a self-managed super fund, providing it is carefully managed.

Family benefits

A key benefit is the ability to combine the family’s super accounts, enabling the fund to obtain a larger and more diversified investment portfolio than otherwise possible with just one or two members.

A favoured strategy includes the SMSF purchasing property used in the family business and leasing it back to the business, a strategy that can provide benefits to both the business and members’ retirement savings.

Creating a single fund also reduces the cost of super, since SMSF administrative costs generally do not increase when more funds are added.

There is also the potential for estate planning benefits, such as allowing for the intergenerational transfer of fund assets.

For example, parents with a mixture of retirement phase pension and accumulation balances could withdraw funds from the accumulation account and loan the monies to their children, who then could make concessional and non-concessional contributions to the fund.

“Depending on the time available and the quantum of the dollars involved, the need to sell assets on your death may be eliminated,” says Heffron Consulting’s Lyn Formica.

Another intangible benefit is giving children an education in investing at a young age, which may help them with financial decisions in later life.

Traps to avoid

Before rushing in though, there are a few issues to consider including potential personality clashes.

Firstly, the fund’s trust deed must permit the admission of child members, even though they cannot legally act as a trustee until the age of 18. A parent can represent them until this time; however, they must be appointed in their own right once they reach adult age.

Once they become trustees, they are equally liable and must be consulted in relation to all decisions. They will also be required to sign various documents, which can become unwieldy with more members involved.

The children will have access to information regarding SMSF entitlements and any arrangements such as reversionary pensions or binding death benefit nominations. There is also the risk of being “outvoted” by the children in the running of the fund without adequate controls.

For all of these reasons, functioning family relations are essential.

“You need to understand your own children’s personalities and not bring in a child who may try to cause issues because they are on poor terms with one or both parents,” says Liam Shorte, director at Verante Financial Planning.

“You must also agree with the children on the chosen strategy for their member funds. If it is the same as the parents then that is easy, but if it is different then separate investment strategies need to be prepared and agreed.”

Shorte, a specialist SMSF adviser, also suggests assessing the insurance needs of all fund members regularly.

“Young people are far more likely to have changing circumstances in terms of debt, financial dependants and income protection,” he says.

It is also important to protect against abuses that can occur among family members. For example, having a binding death benefit nomination will ensure SMSF benefits are paid according to the instructions, rather than at the trustee’s discretion.

In one case, a daughter who had been appointed trustee succeeded in paying her father’s entire death benefit to herself, rather than dividing it equally with her brother as per her father’s wishes, since the death benefit nomination was ruled non-binding.

The four-member limit

The four-member limit on SMSF membership also may cause problems if the family is larger than four, since one or more child will necessarily have to be excluded.

Last year’s move by the Coalition government to increase the limit to six would have allowed for larger family funds, but the legislation was scrapped prior to the federal election, reportedly due to a lack of Senate support.

Brad Hoffman, associate principal at Virtu Super, suggests it could be more sensible to admit children into the SMSF once they are more mature, particularly if they have a special skill that could benefit the fund, such as being an accountant.

“While it is not especially rare to see SMSFs with children as members, it remains in the minority, with the large majority of funds being restricted to the two parents,” he says.

“In practice, most people seem to decide that the difficulties involved with admitting the children outweigh the advantages.”