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The advantages and disadvantages of family SMSFs

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.

Potential advantages

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.

Having two generations of a family in the same SMSF means a fund’s fixed costs are shared over a greater number of members.

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.

Potential disadvantages

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.

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.

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.

Posted on 21 March '16 by , under Super.

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Superfund categories and what they mean

There are four different categories of super funds. These have different primary features and are more applicable to certain people than they are to others.

Retail super funds

Anyone can join retail funds. They are mostly run by banks and investment companies:

  • Allow for a wide range of investment options.
  • Financial advisors may recommend this type of fund as they receive commissions or might get paid fees for them.
  • Although they usually range from medium to high cost, there may be low-cost alternatives.
  • The companies that own these funds will aim to keep some of the profit they yield

Industry super funds

Anyone can join bigger industry funds, but smaller ones may only be open to people in certain industries i.e. health.

  • Most are accumulation funds but some older ones may have defined benefit members
  • Range from low to medium cost
  • Not-for-profit, so all profits are put back into the fund

Public sector super funds

Only available for government employees

  • Employers contribute more than the 9.5% minimum
  • Modest range of investment choices
  • Newer members are usually in an accumulation fund, but many of the long-term members have defined benefits
  • Low fees
  • Profits are put back into the fund

Corporate super funds

Arranged by employers for employees. Large companies may operate corporate funds under the board of trustees. Some corporate funds are operated by retail or industry funds, but availability is restricted to employees

  • If managed by bigger fund, wide range of investment options
  • Older funds have defined benefits, but most are accumulation funds
  • Low to medium costs for large employers, could be high cost for small employers

Self-managed super funds

Private super fund you manage yourself. Many more nuances to this type of fund. Most prominent feature is the autonomy over investment.

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