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Care needed with child members in parents’ SMSF

Parents need to be cautious about including children in their SMSF and should ensure protective measures are incorporated into the operation of the fund in these types of structures, an expert SMSF lawyer has said.

DBA Lawyers director Bryce Figot used the scenario of a family feud where one member of the fund no longer participates in running the fund to highlight this point.

In those situations, Figot identified three options available to the other members of the SMSF, the first of which involved trying to run the fund without the troublesome family member. However, he said a precedent established under case law in Beath v Kousal dictated a fund with joint trustees had to operate in a way where the trustees must act unanimously, effectively ruling out that course of action.

The second option he outlined was one where the dissenting trustee was fired and as a result was eliminated as a member of the SMSF. Again, he identified problems here.

“If you want to kick a member out, what do you need? Their consent,” he said, stressing the fact an uncooperative family member would be unlikely to give that consent in those situations.

The third option he presented was for the parents to cease to be members of the original fund and roll their benefits into another SMSF. He labelled that the best option, but not without associated issues as well.

“The parents might not be happy about having to leave their fund for various reasons. They may not be happy about having to sell assets that could lead to stamp duty issues and might not be able to carry forward capital losses,” he said.

“The moral of the story is keep kids out of the parents’ SMSF. If you must or if you really just want to have kids in the parents’ SMSF, it is best to have a deed that allows trustees to get upfront consent to have the ability to kick them out based on a contingent event, such as the majority of members saying ‘here are your marching orders and here’s written notice that you must leave’.

“But get that consent ideally in writing up front.”

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