Multigenerational SMSFs: Benefits and pitfalls

They say families who play together stay together, but what about families who save together in a multigenerational self-managed super fund (SMSF)?

Now that the maximum number of members allowed in an SMSF has increased from four to six, the question is even more topical. Although judging by recent membership trends, demand may be limited.

According to the most recent ATO statistics (December 2023), the vast majority of SMSFs (68.3%) have just two members, usually a married couple. A further 24.8% have one member. The remaining 6.8% have three or four members, typically parents and their adult children. Approximately 0.1% of all SMSFs have more than 4 members!

Obviously multigenerational SMSFs are a minority – but are they a good idea?

All for one, or one for all?

Meg Heffron, managing director of Heffron SMSF Solutions, treats most SMSFs as a single generation vehicle. However, she says there are circumstances where combining the generations makes sense. “We see it mostly where there’s commercial property in the fund or a family business,” she says.

Former SMSF Association CEO John Maroney agrees that two-member funds are likely to remain the norm. However, for some larger families, he says the ability to have up to six members has the potential to make a real difference, giving them additional flexibility and choice.

So, what are the main benefits and pitfalls of mixing family and fortune?

The benefits

• Cost efficiencies: Maroney says having up to six members in your SMSF will provide for greater cost efficiencies with set-up costs, levies and audits spread across more members. This can be helpful for adult children just starting out, where their relatively low super balance would generally put an SMSF out of reach. What’s more, an increase in an SMSF’s balance will help cut costs as a percentage of assets.
• A bigger pot: By joining forces, parents and their adult kids can invest in large assets such as a business property. This is a common strategy where a family runs a business together. Once a business property is acquired by an SMSF it can be leased back to a related party for business use without the normal 5% limit on in-house assets applying. Heffron says adding members may also make it easier to set up a limited recourse borrowing arrangement (LRBA) because the risks of not being able to cover borrowing costs are lower if there are more members making contributions.
• Cash flow for pensions: Even if parents draw a minimum pension when they are in retirement phase, there comes a time when assets need to be sold to make these payments. “If a client has children who are making contributions to super, one benefit of combining is that their cash flow can finance the client’s pension. In effect, the cash contributions are being used to buy a share of the fund’s existing assets,” says Heffron. This intergenerational transfer of wealth can occur within the fund without the need to buy or sell assets and the tax and other costs that come with that.
• Estate planning: When both parents die, their remaining super balance must be paid as a lump sum death benefit to their beneficiaries or their estate. If they hold property in their fund the family must either sell or transfer the property out of super. However, Heffron says if the children have made contributions over many years and these have been used to buy new assets such as shares, these may be used to pay some or all death benefits. “This may well enable the family to leave part or all of the property in super well beyond one generation,” she says.
• Knowledge transfer: Non-financial benefits should also be taken into account. By managing their super together, parents may be able to provide a hands-on financial education for their adult children. But the knowledge transfer is not necessarily all one way; adult children may bring valuable expertise. Many hands may also make light work as administration tasks can be shared.

The pitfalls