A central concern during succession planning in family businesses is whether adult children should be admitted into a self-managed super fund (SMSF). It is understandably a complex decision-making process, given that it impacts both personal and business succession planning. Moreover, it also plays a part in affecting family relationships and finances.
According to the Australian Taxation Office, there were 534,176 SMSFs in Australia as per the most recent count in June 2014. Clearly, many Australians are adopting this method of saving for their future. However, there are some important considerations SME owners should keep in mind before adding family members to an SMSF. Here are three key ones.
Is this a cost-effective method?
Because the fund’s fixed costs are shared over two generations of family members in the same SMSF, it can indeed minimise costs overall. However, financial woes can arise if the intergenerational SMSF has a portfolio including only one or two main assets to support the costs.
For instance, if the main high-value asset in the fund is the business property, it would need to either stay within the fund so that the adult children can continue to use the premises in the business or be sold in order to pay out the parent’s death benefits on their death. This can result in not only a funding issue but also further tax and stamp duty costs.
How will it impact family relationships?
Under Australian Law, there is a four-member limit for a SMSF. This can be problematic for families with more than three adult children. Another issue is if the members disagree on investment ideas or goals. It can also be difficult if the members have different risk tolerance levels. Combined, these factors could potentially cause family conflict.
How can legal advice help?
Since SMSF’s are so crucial for retirement savings and estate planning, expert legal advice can help manage the fund carefully. Each step of the legal process, from advice on the fund’s structure to ensuring that the SMSF is compliant with relevant legislation, can be eased with guidance from commercial lawyers.