Parents operating an SMSF should think very carefully before admitting their kids to the fund.
One rule of operating an SMSF is that all members must be trustees. Where the trustees are individuals this can mean having up to 4 individual trustees. Where a company acts as trustee this means there would be 4 directors.
One good reason for not including the kids was highlighted by a recent case – Triway Superannuation Fund and Commissioner of Taxation. The fund which was set up in 2002 had 3 members being mother, father and son and hence 3 trustees. The son had a drug addiction and over a period spent nearly all of the money in the fund and all of their retirement benefits were lost. In 2006 the son became bankrupt.
The parents as trustees concealed this for several years, apparently on the advice of their tax agent, until 2008 when they disclosed it to the ATO. The ATO treated it as a non complying fund and the AAT eventually upheld this decision. Not a good outcome!
There are several other reasons why having your kids in your fund can be a problem. If the children have relationship breakdowns it can get messy when divorce proceedings occur.
There is also the case where a father appointed his daughter to the position of 2nd trustee and when the father died the daughter had effective control of the fund and paid the benefits out to herself, much to the disgust of her brother.
A family fund might sound like a good idea but parents need to be aware of the potential problems. If you have kids in your SMSF and have any concerns let me know.
