Building a Legacy: Setting Up Superannuation for Grandchildren in a Family SMSF
Self-managed super Funds (SMSFs) are a popular way for families to gain control over their superannuation savings, build wealth, and encourage financial literacy. At JBS Financial, we’ve recently seen an increase in enquiries from grandparents interested in establishing superannuation balances within their SMSFs specifically for their grandchildren. While potentially beneficial, this approach brings a unique set of considerations.
Before proceeding, it’s essential to ensure that you have read and fully understood your SMSF’s trust deed, as this document serves as the “rules of the fund.” Being clear on these rules helps avoid potential compliance issues and ensures that all actions within the fund align with its foundational structure.
Here’s what you need to know about setting up super for younger family members in an SMSF.
Age and Control: Trustee Requirements
The trustee-member connection in an SMSF varies depending on the grandchild’s age. For those aged 18 and over, the grandchild can directly serve as a trustee or, in the case of a corporate trustee structure, as a director. For minors (under 18), a parent or guardian must act as their representative until they reach adulthood.
Control mechanisms within the SMSF also play a critical role. It’s essential to understand whether voting power is determined by a simple majority or by member balances. Additionally, it may be advisable to review the fund’s deed and the corporate trustee’s constitution to ensure alignment with these objectives. In some cases, grandparents may find it simpler to consider using a retail superannuation fund to bypass some of these complexities.
Contribution Options and Limits
A unique advantage for those under 18 is the ability to make non-concessional contributions, including accessing the three-year bring-forward rule, which allows up to $330,000 in contributions within a three-year period. For concessional contributions, however, the grandchild needs to be either employed or have turned 18 by 30 June to qualify. Once eligible, they may also utilise the five-year unused concessional contribution cap, provided they have not exceeded the $500,000 cap for concessional contributions.
When making contributions, it’s important to remember that any funds contributed directly by grandparents will be considered concessional. To avoid this, grandparents should gift the funds to their grandchild, who can then contribute the amount independently.
Family Dynamics and the Pros and Cons of a ‘Family’ SMSF
Adding grandchildren or children to an SMSF can foster financial responsibility and collaboration, enhancing family members’ financial literacy. However, families should assess both the potential benefits and risks. SMSFs can be a great vehicle for intergenerational wealth transfer, such as commercial property investments, provided there is a clear structure and a mutual understanding of responsibilities among members.
Yet, this arrangement also brings risks. Misuse of fund resources, potential legal challenges during relationship breakdowns, and control issues following a trustee’s death are all potential complications. Real-life cases have shown how poorly managed SMSF structures can result in significant financial and personal turmoil.
A Family Decision
The decision to incorporate family members, especially grandchildren, into an SMSF requires careful consideration. By weighing the benefits of enhanced financial engagement against the possible risks, families can make informed choices. At JBS Financial, we’re here to guide you through each step, ensuring that your SMSF aligns with your family’s goals and safeguards their financial future.
If you’re considering an SMSF for your family, particularly for younger generations, reach out to our team at JBS Financial to explore tailored options that best support your family’s financial legacy. Reach out to our team here.