The Family SMSF – building Generational Wealth
There are more than 600,000 SMSFs in Australia controlling more than $750 Billion – so on average each fund holds more than $1.25M. Many of these are dying SMSFs due to the lack of skill of their accountants, planners and advisers in planning for succession in a SMSF. I see it so often where one member becomes mentally incapacitated, or one dies and suddenly we are down to a one-member fund waiting for the last surviving member to die along with the fund.
If SMSFs have been given the green light to carry on into infinity and beyond under SISA 93, it astounds me that so many funds are terminal. And with 430,000 members over the age of 65, holding more than $300Bn in assets the next twenty years provide the world’s greatest succession planning opportunity. Why set them up to die when you can build intergenerational wealth forever!
Family and Leading Member SMSFs plus a whole lot of strategies, SMSF and estate planning will be part of my SMSF Strategies and Estate Planning Day in October – make sure you come along – go to https://ilovesmsf.com/roadshow/ to register.
BUT: Many advisers are short sighted when it comes to succession planning in a SMSF because they don’t know what they don’t know. I see big accounting firms warning that a Family SMSF is dangerous because of different member ages and investment needs, the loss of franking credits by older members in the fund to younger members, divorce, members moving overseas, younger members not wanting responsibility plus to me the real reason, it creates extra administrative work (which usually means more $$$). Now from my experience, NONE of these ring true (as you will see later) but if you have never built a properly functioning Family SMSF, then you don’t know what you don’t know. SMSFs are about positive strategy, challenge and growth not negativity and lack of knowledge. If a client wants Family SMSF, particularly as we move to six member funds, then now is the time to upskill and at the same time, build a strong and steadfast Family SMSF for your SMSF clients. This is not the time, given the succession statistics above to put your head in the sand. SMSFs are changing and we must change with them.
Seriously: Can any smart SMSF adviser recommend that their client with a $1M+ SMSF should leave their children in an industry super fund and not join their family??? Really??
- The Three Types of SMSFs
Having worked in the SMSF industry for over 25 years, I have found that there is a wide range of SMSF clients – those that want to do everything themselves (the DIY’ers), the SMSF’ers and those that are happy to build their Fund into a strong, strategic Family SMSF. Let’s have a look at each of these types of SMSFs and my reasoning why Family SMSFs are the only intergenerational wealth creation SMSF:
I. The DIY Super Fund
This is a super Fund where there is a strong handsn focus by the Trustees of the Fund – the true Bunnings DIY style of Fund. The Trustee generally does the accounts of the Fund using an accounting program or excel spreadsheet. All bank reconciliations, income receipts and expenses are accounted for and the management of the investments are undertaken by the Trustee. Due to the complexity of the superannuation and taxation laws, the Trustee will need an accountant to compile the tax return and must have an independent audit under the SIS Act 1993. As can be imagined, unless the Trustee is only investing in one or two simple property investments, there is a lot of work that must be done by the Trustee – for a Trustee trading shares it is a full-time job.
Of course, once the Fund goes into pension mode with, ideally, the Trustee running a simple but strong SMSF strategy of a retirement accumulation account running alongside for any excess super benefits over the $1.6M TBAR ,the DIY Fund gets left behind. The use of separate investment strategies, multi-generational reversionary pensions and other important but simple SMSF strategies, are way beyond the Trustee’s capability. Not knowing or using common tax strategies ends up costing the Trustee and their family a lot of money and wealth but in the end they are SMSF ostriches – don’t know and don’t want to know.
II. The Standard Self-Managed Super Fund
This is the next level above the DIY superannuation Fund and one that the majority of SMSF Trustees run with their compliance outsourced. Again, the focus is on investments but the Trustees of a SMSF generally have the advantage of tax and superannuation advice from their accountants and financial planners. Strategy in a SMSF may be around pensions, LRBAs and maybe some insurance and taxation strategies but there is no sophisticated estate planning, succession or aged care planning, separate investment strategies are non-existent and well the list goes on. They are functional but they are terminal. At the end of the day the strategic input will depend on the SMSF skills of the advising professional and the willingness of the Trustee to learn and enquire what is possible within their Fund. And to be honest there are also a lot of accountants and planners who are also SMSF ostriches all tied up with compliance and not strategy.
Newsflash: The latest Commissioner of Taxation blitz on investment strategies where 17,700 letters were sent to SMSF trustee and their auditors on having a single asset class, with potentially another 160,000 to come has really brought home the lack of understanding many compliance accountants, administrators and more importantly auditors, on the legal requirements of an investment strategy particularly that it is forward looking not a historical punch out six months after year end.
III. The Family SMSF
This SMSF is the same tax structure as a DIY super Fund and a SMSF but the key focus is on the family. Surprisingly, of all the SMSFs in Australia that have the opportunity of bringing up to four, and soon to be six members of a family into the Fund, only 10% have chosen to do so. 20% of SMSFs have only one member with 70% having only two members. This is a great loss of opportunity – can anyone imagine what it would be like to establish a family trust with only one or two beneficiaries. No accountant in their right mind would recommend this course of action. So why a SMSF? It beggars belief.
To see the difference between the Family Super Fund and the DIY or standard SMSF Fund, consider some of the following Family Super Fund strategies:
- An adult child member in the Fund has an accident and spends six months off work. The Trustees of the Family Super Fund can begin to pay out salary continuance benefits (from the member’s superannuation benefits, any fund insurances plus any earning or reserves) to the incapacitated member to ensure that their salary and wages are kept to a level they were, before the accident. Does that happen in an industry super fund?
- The different ages in the Fund provide different investment strategy opportunities. Provided the Fund’s deed allows, different members may run their own sub-fund (which has been available under BGL and Class super platforms for a decade or more) which includes their own investments. We could have the older members of the Fund in pension phase receiving franked dividends and interest on their specific investments while the younger members invest in property with an LRBA – by having separate investment strategies it has no TBAR consequences for the older members. Not only does it allow different generations to have different investment strategies BUT each member can have their own bespoke investment strategy – what a gift! Does that happen in an industry super fund?
- Mum is the sole remaining parent member of the Fund and has been diagnosed with dementia. The adult child members are in the Fund guiding her superannuation benefits towards the best in health and psychological care for their mother. They have her EPOA and run the Fund to benefit her and all members of the Fund in accordance with section 52B(2) of the SISA 93;
- The retiree pension members of the Fund invest in Australian shares with imputation credits. These credits are used by the Trustee of the Fund to reduce any of the Fund’s tax liabilities including any contributions tax liability of the younger members of the Fund that salary sacrifice. Now this is great news and hardly a reason to not have younger members in the Fund unless the adviser has not put in place restitution where the younger members pay the older members (at their discretion) for the value of the franking credits. This is the matter for a family to discuss with their strategic adviser who will come up with a bespoke solution.
In short, these unique super Funds have a very special place in Australia, and for that matter the world. If designed and used properly – they allow the aggregation and investment of a family’s superannuation benefits, as well as providing a pool of monies and assets to look after family members including children and grandchildren at the time of an accident, sickness, permanent disability, death, pre-retirement and retirement. Once an adviser has built one for a client the whole world opens up.
- Let’s look as some important Frequently Asked Questions regarding a Family Super Fund from clients to their accountants, planners and advisers?
Q: I have a SMSF – can this be turned into a Family Super Fund or do I have to get some more documentation or a different trust deed?
Provided you are using a trust deed, which has in-built Family SMSF strategies and options, there is nothing preventing you and your family using your SMSF as a Family SMSF. I have authored a number of trust deeds to ensure they meet the strict guidelines of a Family SMSF. ALL LightYear Docs SMSF deeds have been built for the purposes of six-member Family SMSFs and are only $99 for establishment or upgrade.
Q: I don’t want to bring my children into the Fund and then they take control when I get older.
This is an easy fix. When a child, brother, sister or grandchild becomes a member of the Fund, they must become a Trustee of the Fund or director of the Fund’s corporate Trustee, if the Fund has one. For child members under the age of 18, one of their parents can act as a Trustee or director on their behalf. A corporate Trustee is where a company acts as Trustee of the SMSF rather than individual members. But as a Trustee, each member must be involved in the decision-making process which means each member must be a director – except if the member is a child.
Under a smart Family SMSF trust deed, each Trustee is given the same number of votes for each $1 sitting in the account balance of the member they represent. This means that, although an adult child may be a member, their voting power when it comes to investments and major decisions of the Fund is limited. For example, if they have $10,000 in their superannuation account then that will be 10,000 votes. But if the main member of the Fund has $900,000 then they will have 900,000 votes. But better still put in place a Leading Member SMSF….
Q: I have heard of a Leading Member SMSF where there is more control? What is it?
A Leading Member SMSF is a simple, secure, effective and a way of putting a moat around family wealth and control of family SMSF investments. It ensures, through the control of the SMSF by successive Leading Members that lineage is protected and, in some cases, are the only parties to any distribution of income or benefits from the SMSF or Will.
So, who is the Leading Member?
This is the person who controls the Fund. They have power to appoint and remove members, ensure any death or other benefits only go to the Leading Member’s lineage, can veto any Board decision of the corporate trustee if it runs counter to protecting lineage. Importantly if an adult child in the Fund has separated from their spouse the Leading Member can remove them from the Fund until that time as their divorce is finalised. They simply transfer them to an industry super fund. As an aside to be in a SMSF or Leading Member SMSF when going through separation is strategically a much better option than any industry or retail super fund – provided the adviser or lawyer know what they are doing!
In terms of succession, if the Leading Member dies, becomes incapacitated, goes bankrupt or resigns as Leading Member the next in line, the successor Leading Member steps in and so on.
** Only LightYear Docs has the Leading Member SMSF which has a trademark pending. We will be going into it in detail at the October Roadshow: https://ilovesmsf.com/roadshow/
Q: I have three children. How do I get all of them into the Fund?
The limitation of SMSFs is that only four members can reside in the Fund at any one time. This means that the controllers of a Family SMSF – generally the parents – need to choose who is best to occupy the Fund at that point in time. As with children living at home, at some stage a child’s benefits and personal family circumstances may see them commencing their own Family SMSF with their spouse and children – this may leave an opening in the parent’s Fund which may be filled by another child. Alternatively, for sizable Funds it may be wise to consider two or more Family SMSF to cover the immediate and possibly the extended family.
However, with the proposed update to six member funds, that will open up further possibilities.
Q: One of the members of the Fund is incapacitated, overseas or does not want executive duties in the Fund what do we do?
The first and most important thing for any adviser or planner if they receive this question is to use the LightYear Docs platform to complete an EPOA for all members of the Fund. Hopefully this is completed prior to the incapacity. Under the LYD platform the member can provide an EPOA for superannuation purposes only, that is to act as trustee or director of the corporate trustee on behalf of a member of the Fund.
In fact, for many SMSFs where members are older or overseas, or where a member is too young or does not want the responsibility of running the Fund or being party to the executive actions, then their EPOA could transfer responsibility to one member. In fact, it is possible with a SMSF and in particular a Leading Member SMSF that one member is the sole trustee as they hold all other members superannuation EPOAs. Again, a strategy to bespeak a Family SMSF not a negative downside on having a younger or overseas member in the Fund!
What a wonderful future we have as strategic SMSF advisers, helping families for generations to come. The only thing I can say is “Stay Strategic”.