Many small business owners who run a family business and are nearing retirement face the significant decision of whether to include their adult children in their self-managed super fund (SMSF) as part of their personal and business succession planning.
Including children in a family SMSF can have a critical impact on family relationships and finances, especially if parents and adult children work together and share ownership of a family business.
While potential benefits exist through well-planned intergenerational SMSFs, it is crucial for owners to compare the possible advantages and disadvantages of intergenerational SMSFs.
- Estate planning and business succession
A popular strategy among family business owners is to hold their business premises in a family SMSF indefinitely so the ownership and management of the business can pass to the next generation. This strategy can also help build-up enough assets in the SMSF to be used to pay out the parents’ retirement and death benefits if necessary.
- Cost minimisation
Having two generations of a family in the same SMSF means a fund’s fixed costs are shared over a greater number of members.
- Assistance in running the fund
Including adult children in ageing parents’ SMSF can help when making administrative and investment decisions for the fund. For example, parents can grant their children the authority to become their enduring power of attorney to make any financial decisions should the parents lose their mental capacity.
- Family conflicts
Family conflicts can include disagreements over investment choices or family business decisions, break-up of parents’ or adult children’s marriages or even personality clashes. Family conflicts can also trigger the division of fund assets and, sometimes, the forced sale of fund assets.
- Different investment goals and ideas
Differences in investment goals and ideas can make running an intergenerational SMSF quite difficult. While it is possible to run different investment segments for different members depending upon a fund’s trust deed, this can add further costs and complications.
- Limit on SMSF membership
The four-member limit on SMSF membership can be quite an obstacle for families with three or more adult children. A way of dealing with this limit is to have multiple intergenerational SMSFs within the same family, which are called “parallel” funds.
Under such an arrangement, parents are usually members of all the family’s SMSFs. The funds typically have a share in the same assets such as business premises.