Before adding children to a Self-Managed Super Fund [SMSF], parents should carefully consider the implications. These include what it means for a child to become a trustee, how it may impact decision-making and fund control, the potential for disputes, and succession after a parent’s death.

Most of our clients with SMSFs have only 2 members – typically the parents. While the law now permits up to 6 members in an SMSF, very few clients pursue this option. So, why would parents consider bringing their children into the fund?

 

Why add children to an SMSF?

 

Funding

One of the most common reasons parents add children to their SMSF is to increase the fund’s purchasing power. For instance, if trustees wish to acquire real property or shares but lack sufficient capital, they may consider inviting a child to join the fund. The child then rolls over their superannuation from a public offer fund into the SMSF. This avoids the need for a limited recourse borrowing arrangement (LRBA) and boosts the fund’s available cash.

 

Education and mentoring

Parents may want to involve their children in the practical management of an SMSF to teach them about investing and managing wealth. This hands-on experience can be an effective long-term succession planning strategy, allowing the next generation to understand the responsibilities and mechanics of managing a fund.

 

Estate planning and succession

The inclusion of children in an SMSF can be particularly helpful where the fund holds lumpy assets, such as business real property. If one parent dies and the fund is required to pay out a death benefit, but lacks sufficient liquid assets to do so, it may be forced to sell the lumpy asset – often incurring tax and duty costs.

Adding a child to the fund and rolling in their superannuation balance [typically held in cash] can provide the liquidity needed to pay the death benefit, allowing the lumpy asset to remain within the fund. This strategy can be particularly effective when coupled with proper succession planning and binding death benefit nominations.

 

What to consider before adding a child

 

Trustee responsibilities and legal risk

Under the superannuation laws, all members of an SMSF must be trustees or directors of the corporate trustee. This means children, once admitted, will have full legal responsibilities alongside their parents. Each trustee is jointly and severally liable for the actions [and inactions] of the others. Children will also gain access to all fund information, including member balances.

While this may be beneficial for transparency, it does mean that children could become entangled in compliance breaches caused by the parents. If a compliance issue arises, such as a loan to a related party or breach of investment restrictions, the child trustee may be caught up in any resulting regulatory action – even if they were not involved in the breach.

 

Decision-making and voting rights

In most SMSFs, trustees must act jointly. This means children will have a say in all decisions, including investments, payments, and administrative matters. Some trust deeds allow for weighted voting based on member balances, which can give parents more control, but the children still participate in decision-making. This can either promote collaboration or create tension, depending on family dynamics.

 

Disputes and member exit

Parents should prepare for the possibility that their children’s life circumstances or relationships may change. If a child wants to exit the fund, they may not be able to roll out easily if their member balance is tied up in illiquid assets, like property. This can lead to disputes and legal challenges, especially if the child feels financially disadvantaged or locked into an unwanted arrangement.

 

Control after death

If a child remains in the SMSF after a parent’s death and no binding death benefit nomination is in place, the child could gain effective control over the fund. This includes determining how the deceased member’s benefits are distributed. In blended families, this can become highly contentious – especially if other siblings or a second spouse believe they were intended beneficiaries.

While fiduciary duties apply, enforcing these obligations often requires litigation, which is costly and emotionally draining. This risk can be mitigated by ensuring all members have up-to-date and valid binding death benefit nominations, and by only admitting children who are financially responsible and trustworthy.

 

Cycling assets through re-contribution

In some cases, parents may use a re-contribution strategy to gradually transfer wealth and control of the fund to their children. This involves parents withdrawing funds [where eligible] and re-contributing them into the fund in the children’s names. Over time, the children’s member balances increase, giving them greater ownership of the fund. If done properly, and assuming all parties live long enough, this strategy can allow for the retention of lumpy assets within the fund while cycling out the older generation in a tax-effective way.

 

Weigh up the benefits vs the downsides

 

Admitting children to an SMSF can be a powerful strategy for succession, liquidity and education but it is not without risk. Parents must weigh the benefits against the potential downsides, including compliance risk, future disputes and the long-term implications for control of the fund.

 

Get in touch

Anyone looking to add children to their SMSF, should consider reaching out to the team at businessDEPOT Legal – we will help ensure the structure supports the family’s goals and protects family assets.

 

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