The concept of the family super fund (FSF) has started to enter the vocabulary amongst SMSF trustees and advisers over the past year as a way to bring together family members to invest and manage their total wealth.
The focus of the family super fund concept is to provide for not only the members today, but to also provide for the effective transfer of wealth for future generations.
The effective transfer of wealth is an important issue moving forward, because as we live longer, it will not be uncommon that the next generation of beneficiaries will be close to retirement themselves.
Statistics as at 30 June 2010 shows the average fund having only 1.90 members, well below the minimum of four members allowed. The recent Super System Review (Cooper Review) which covered SMSFs, considered the issue of the number of fund members, but the Panel recommended no change to this arbitrary figure as the average didn’t support any need to.
So, with a limitation of up to four fund members, what are the real benefits as to why you would consider setting up a “family super fund”? or by doing so, are you simply setting yourself up for a family feud?
Let’s take a look at the pro’s and con’s of the family super fund:
Pro’s of the Family Super Fund
- You have the ability to ‘control’ the family wealth through a single tax structure that provides significant tax concessions to benefit all members, both through accumulation and pension phase;
- The FSF could look to acquire property using a limited recourse borrowing arrangement. The older members could pay the deposit, with future contributions being made by the younger members to repayment the loan.
- Wealth of the younger members could be ‘housed’ within mum or dad’s account to be taxed at concessional rates (maybe no tax) and redrawn as and when needed through a pension or lump sum (assuming mum or dad have retired and met a cashing condition). This concept is in reverse to what we understand with family trusts, as the focus is on distribution of wealth through members over 60, rather than spreading income across multiple beneficiaries.
- You have the ability to run reserves within the FSF to:
- transfer wealth from older members into the next generation. This can be done via allocated surplus amounts from reserve accounts
- self-insure all members – in particular be able to provide an income stream for a child within the fund in the event of disablement;
- To generate a large tax deduction through the payment of an anti-detriment amount (the tax-saving amount), when a lump sum is paid to a SIS dependant in the event of the death of a member; and
- hold specific assets (such as the family business premises) within the Reserves separate investment strategy to retain within the fund over many generations.
- The ability for the younger members of the fund to over time take a more active role in the fund as the parents get older and have less ability to manage the overall affairs of the fund. This can be achieved through granting an enduring power of attorney.
Con’s of the family super fund
- SMSFs are naturally limited to no more than 4 members. How do you decide who to include or exclude when it comes to families of more than four?
- The marriage of children adds in-laws and a new life together for husband and wife and their own family. The supposed benefits of a family super fund can become lost on future generations as they start a new family of their own.
- In this day and age with people travelling and working all around the world, careful consideration needs to taken to ensure that the fund retains its complying status as an Australian Super Fund (meets the residency requirements to receive tax concessions). This could cause concerns should members decide to move overseas for a significant period of time.
- Operating a family super fund will add significant cost to the ongoing operation of the SMSF. Whilst many of the strategies can add significant benefit to the members, expect significant cost to manage these highly-technical strategies. It may simply be too cost prohibitive to consider running. Subject to the size of the family, this concept may need to be run through two SMSFs, with unit trusts, which as you can imagine, starts to add significant layers of costs.
A further issue to consider in deciding whether to proceed to build a family super fund includes how should you structure the voting rights of the fund – should each member have one vote or are votes based on account balance?
When deciding to build a family super fund, it is important to look at tailoring specific provisions of the fund’s trust deed or introducing other agreements to deal with key family matters of holding this wealth inside a SMSF. For example, appropriate consideration needs to be given to issues around what happens to the business premises inside the super fund that runs the family business in the event of the death of a fund member? Can it be sold? Who can make this decision? Who has first rights to acquire?
The case of Katz vs. Grossman is an excellent example of how the concept of a family super fund can go wrong. Whilst not a family super fund in its own right, this case demonstrated the issues of adding in children (and subsequently in-laws) into the fund without understanding the impact of doing so – in this case at the exclusion of Ervin Katz’s son. Without appropriately documenting the wishes of how a member’s benefits are to be dealt with, the benefits of strategies introduced for the “family” can be quickly eroded in solicitors fees fighting over an estate.
Personally, I’m an advocate of the family super fund in certain circumstances, but it is not for everyone. I believe the size of the fund has a big role to play, including the amount of wealth held outside of super. The age of the beneficiaries and their own financial circumstances will also influence the result. Where a beneficiary is closer to retirement, their focus will be towards building super, assuming they have significantly reduced debt or even paid off their family home. Younger family members will still be struggling with mortgages and kid’s school fees, so super simply isn’t attractive at this stage of their lives.
I heard recently of a person who stated in their Will (after their death benefit nomination stated that their super benefits are to be paid to their Legal Personal Representative), that in the event of their death, $450,000 of their estate was to be paid to each child on one (1) condition… that they made a $450,000 contribution into superannuation to build for their own retirement. If they didn’t do this, then these benefits were to be paid to the father’s nominated charity, The Red Cross. If you are one of the beneficiaries, it makes for a pretty easy solution I would have thought!! however, it would arguably be more prudent for this member to start thinking about building a family super fund to benefit his next generation.