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Power to dump members key in SMSFs with kids

A trust deed with obtained consent to fire minority members can mitigate the risks of having children in an SMSF, however, it was not common practice, an expert SMSF lawyer has said.

The family SMSF scenario should typically be avoided altogether as it could result in negative implications, DBA Lawyers director Bryce Figot said last week.

“Unless there are very specific reasons, keep kids out of the parents’ SMSF,” Figot told the Chartered Accountants Australia and New Zealand 2014 National SMSF Conference in Sydney.

“If you must or really want to have kids in the SMSF, I think you’re running a risk, but if you want to mitigate that risk, have a deed that allows the trustees to get upfront consent to kick members out based on a contingent event, such as the members with majority balances give a notice.

“Get that consent, ideally in writing, upfront.”

However, upfront consent was not commonplace in the SMSF industry, he said.

“If a client does want to kick a minority member out, this is an example of some of the difficulty you might come up against,” he said.

“Let’s assume the deed empowers us to do it and miraculously, with a lot of foresight, the upfront consent was obtained before [the minority member] joined the fund.

“If the parents enforceably kick him out because they weren’t getting on very well beforehand, how might the member react afterwards? Naturally, they might seek to challenge.”

The parents in the SMSF must therefore ensure in addition to the written consent, that the deed provided appointer power to members with majority balance, that the appointer power was not fiduciary and a member could be kicked out with the upfront consent, he said.

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