SMSFs are sometimes referred to as “family” super funds since they can hold parents and two children as members, DBA Lawyers director Bryce Figot told the Chartered Accountants Australia and New Zealand national SMSF conference in Sydney last week.
Mr Figot used the example of one child becoming estranged from their family while they are a member of the family’s SMSF. The SMSF has both parents as individual trustees.
He noted that while operating the SMSF without the estranged child might seem like a viable option, trust law “does not operate like this”.
“As [Justice] Street in Sky v Body (1970) 92 WN (NSW) 934 said, ‘Inherent in this basic system of trusts is the principle that trustees must act unanimously. They do not hold several offices – they hold a single, joint, inseparable office. If conflicting business considerations lead to such a divergence that the trustees are not able to act unanimously, then the simple position is that they cannot act’,” Mr Figot said.
If there was a corporate trustee structure in place, however, the position might be different, Mr Figot said.
Another option is that the parents roll their benefits out of the SMSF; however, Mr Figot said this is “riddled with problems”.
For example, the SMSF may have carried forward capital losses due to the GFC and rolling out of the SMSF means the benefit of the losses will be lost.
Broadly speaking, Mr Figot said, children should be left out of an SMSF.
“Having children in their parents’ SMSF exposes the SMSF to risks. One key risk is, what happens if there is a falling out between the children and the parents?” Mr Figot said.
“Although there are ways to try to address these risks, my view is unless there is a particularly compelling reason to have children in the SMSF, leave them out and avoid the risks altogether.”
With a >40% divorce rate in Australia, why risk your smsf by including a child? Whether married our defacto, superannuation can be split under family law. Consider a mum, dad and adult son with property and perhaps borrowing. Daughter in law, not a member divorces and gets 100% of his super? Will the property have to be sold? Will the spouse’s agressive lawyer request independent valuation of the property? Will sale be impossible and now despised ex have to become a member of the smsf, and trustee with her ex’s parents who hare her guts?
This is something financial planners just dont get, prefering to focus on exploiting operating losses for anti-detriment, capital losses in a pension fund. FP’s are the new agressive “accountants” of the 1970’s & 80’s. FPs think they look clever when they think the find a tax loophole. Those days are gone, and you are putting yourselves and your client at risk whenever you embark on such strategies.
I agree. The problem arises with all trusts, including executors and trustees of testamentary trusts. Unless a tiebreaker is put in the trust deed or will trust or the trustee can be removed, a recalcitrant trustee can make life very difficult indeed. But in the case of an SMSF you can’t sack a member as trustee.