In recent times the focus on using an intergenerational SMSF as part of an overall estate planning strategy has increased, particularly where the succession of a family business is concerned. But what exactly is an intergenerational SMSF?
Typically it’s a ‘family’ SMSF, where the members are two parents and up to two of their children. You can’t have more than four trustees of an SMSF, courtesy of section 7 of the Trustee Act 1925 in New South Wales (and similar legislation in other states and territories).
The advantages of using an intergenerational SMSF include:
• pooling of superannuation assets of family members into the one fund,
• easy succession of control in the event of the death of a member and in case of member incapacity if enduring powers of attorneys are in place,
• no trust ‘perpetuity period’, meaning the fund can ‘live’ for longer than the normal 80-year lifetime for a trust, and
• use as a very tax-effective and asset-protective vehicle for wealth accumulation and eventual transfer to the next generation.
However, potential disadvantages include:
• conflicts over investment choices or business decisions and the breakdown of parents’ or children’s marriages may result in deadlocks, forced asset sales, et cetera,
• conflicts over different investment goals between members, especially where liquidity is an issue, and
• the four-member limit on SMSFs where there are more than two children.
The main intergenerational SMSF estate planning strategies pre-budget 2016 included:
• using anti-detriment payments to increase death benefits and create a significant tax deduction (which could be carried forward if unused) within the fund for the benefit of future generations of members,
• facilitating ‘in-fund’ asset transfers to children by increasing the size of their accounts
relative to their parents’ member accounts in the fund, through methods such as:
– children making super guarantee and additional concessional contributions,
– parents helping out via re-contribution of tax-free pension/lump sum drawings, including from transition-to- retirement income streams (TRIS), and
– via parents and children making non-concessional contributions.
In particular, where the family business premises is held in the fund, parents could effectively transfer the premises within the fund via an in-fund asset transfer strategy – especially in an environment where you could make virtually unlimited non-concessional contributions subject only to the annual limit of $180,000 a year (or $540,000 over three years under the bring-forward rule).
Using this strategy could mean the family business premises could remain in the family SMSF through successive generations.
However, Budget Paper No 2 contained measures that on the face of it would seriously impact on the ability of SMSFs to use these strategies, such as:
• the proposed $500,000 lifetime non-concessional contributions cap, taking into account all non-concessional contributions made since 1 July 2007,
• from 1 July 2017, the $1.6 million cap on accumulated super an individual can transfer into tax-free retirement phase,
• from 1 July 2017, the reduction in the concessional caps to $25,000 a year,
• from 1 July 2017, the abolition of the anti-detriment provision, and
• from 1 July 2017, removing the tax-free status of earnings of assets supporting a TRIS.
Besides obviously removing the anti-detriment strategy, these proposed measures would materially limit the ability to facilitate in-fund asset transfers to children, as well as the ability to build a large death benefit within super.
However, since the coalition was returned to government, there has been much speculation in the press about Prime Minister Malcolm Turnbull being open to adjustments to superannuation policy. In particular, there has recently been talk regarding introducing exemptions to the $500,000 lifetime cap for people who get divorced or receive inheritances or personal injury payouts, and farming.
There may also be relief for those with limited recourse borrowing arrangements under way before budget night, and the retrospective start date may also be reviewed.
Until the details are finalised, how the changes to superannuation policy will impact on intergenerational SMSF strategies going forward remains to be seen.
In any event, these strategies should still be useful for intergenerational wealth transfer, albeit perhaps on a more limited basis.