Lawyer outlines ‘hidden’ effects of children in SMSFs
Having children in their parents' SMSF has potentially significant risks for the fund and its trustees, one industry lawyer has suggested.
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.”