The announcement of a six-member fund surprised many in the industry given over 90% of SMSFs currently have only one or two members.
However, a six-member fund provides people with more flexibility in an SMSF and will be attractive in some circumstances, so we’re going to explore the benefits of them and highlight important questions to consider.
There are some significant benefits in increasing the number of members in a fund from four to six.
As a parent myself, I like the idea of having Adult children in my SMSF as it provides a great opportunity to teach them about investments, taxation and planning for the future.
Whilst you may find the idea of having your children in an SMSF appealing, remember, as an SMSF member they must also be a fund trustee.
As a trustee, they are responsible for overseeing all matters of the fund, which includes ensuring the financial statements and Annual return are accurate at the end of each financial year.
This will give them full access to your member balance – meaning they will know exactly what Mum and Dad have sitting in super, and what any death benefit insurance will be payable upon death. Perhaps not ideal in some circumstances.
There are some challenges in running a six-member SMSF, but like any challenge they can be overcome with simple planning.
Important questions to consider:
It’s likely the majority of funds would select a Corporate Trustee, as you can add or remove members in the SMSF without the administrative burden. With an Individual Trustee structure, you would need to update the names of all investments, bank accounts and underlying fund documentation every time you have a change of member which is not only time consuming but can be expensive.
If it does, you will need to update the fund deed prior to making any changes which is a fairly straightforward process.
Super legislation does not specify the voting rights, but if you have a corporate trustee, the constitution may provide rules on voting rights. It’s vital to ensure this is agreed upon before adding a member to a fund to ensure the existing member’s rights are protected.
It’s prudent to ensure the SMSF trust deed includes a clause outlining the terms upon which a member may leave the fund. This will help avoid any disputes in the event any of them want to exit the fund.
There are two approaches one can take here. Consider the overall fund risk profile and invest to suit the fund as a whole or consider asset segregation.
In an SMSF you can completely segregate bank accounts, and underlying investments by member, enabling each member to determine their own investment selection, desired rate of return and asset allocation accordingly.
This may be one of the highest risks of adding additional people to an SMSF but can be overcome by ensuring a valid binding death benefit nomination is in place or a reversionary pension to dependents.
Before making any decisions regarding SMSF fund structure it’s wise to seek formal financial advice to ensure your personal circumstances are fully considered and any future risks identified and mitigated.
To find out more about this article please contact Olivia Long in our office.
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