November 2024
It’s the last month of Spring and with summer on the way and many already planning for Christmas and holidays, it might be a busy month.
This month:
SMSF’s: KEEPING IT IN THE FAMILY – Self Managed Super Funds can offer their members many benefits, but one that’s often overlooked is their potential as a multigenerational wealth creation and transfer vehicle. We discuss some of the advantages of family SMSF’s, particularly for those with a family business, and some of the challenges that need to be managed.
HELPING THE KIDS WITHOUT DERAILING YOUR RETIREMENT PLANS – As parents, the instinct to support our children never truly fades, even when they become adults but when you are looking at giving them a financial helping hand there is a bit to consider.
INSURING AGAINST LOSS OF INCOME – Protecting income from unexpected illness and injury is particularly important to anyone with a mortgage to service, small business owners and self-employed people with no sick leave available
As always, if you would like to discuss the contents of this newsletter, please feel free to contact our office.
SMSFs: keeping it in the family
Self managed super funds (SMSFs) can offer their members many benefits, but one that’s often overlooked is their potential as a multigenerational wealth creation and transfer vehicle.
Family SMSFs are relatively rare. According to the most recent ATO statistics (2022-23), the majority of SMSFs (93.2 per cent) have only one or two members.i Just 6.6 per cent have three or four members and only 0.3 per cent have five or six members (the maximum allowed).
Advantages of a family SMSF
An SMSF is sometimes established when two or more generations of a family share ownership or work in a family business. The fund can then form part of a personal and business succession plan, potentially making it easier to pass on ownership and management of assets to the next generation.
With more members, SMSFs also gain additional scale, allowing them to invest in larger assets (such as property). You can add business premises to the SMSF and lease it back without violating the related parties rule and 5 per cent limit on in-house assets.ii
Reduced tax and administration costs are also a benefit of multigenerational funds.
Running a family SMSF means the costs of establishing and administering the fund are spread across more members. This can be particularly helpful for adult children just beginning to save for their retirement.
In addition, more fund members means more people to share the administrative burdens of running an SMSF, which may be helpful as you get older.
A family SMSF does not need to be automatically wound up if you die or lose mental capacity and they can simplify the process of paying out a member death benefit as well as potentially allowing it to be paid tax-effectively. Note that death benefits paid to non‑tax dependent beneficiaries incur a tax rate of up to 30 per cent plus the Medicare levy.iii
More fund members also make setting up a limited recourse borrowing arrangement (LRBA) easier because their contributions reduce the fund’s risk of being unable to pay the borrowing costs. (An LRBA allows an SMSF to borrow money to buy assets)
Funding pension payments
Another advantage of an SMSF with up to six members may be when the fund begins making pension payments to older members.
If younger members are still making regular contributions, fund assets don’t need to be sold to make pension payments, which avoids the realisation of capital gains on assets.
Family SMSFs can also provide non-financial benefits, helping to transfer financial knowledge and expertise between the generations. And, while your children gain a solid financial education from participating in the running the SMSF, they can also provide valuable investment insights from a different perspective.
Risks and responsibilities
It is important to note that a multigenerational SMSF may not be right for everyone.
SMSFs of any size come with some risks and responsibilities. You are personally liable for the fund’s decisions, even if you act on advice from a professional, and your investments may not provide the returns you were hoping for.
Before you start adding your children and their spouses to your fund, it’s essential to spend time thinking about the challenges in running a family SMSF. Developing an asset allocation strategy catering to different life stages can be complex. Older members may prefer a strategy designed to deliver a consistent income stream, while younger members are usually more focused on capital growth.
Risk profiles are also likely to vary. Typically, younger fund members have a higher appetite for investment risk than members closer to retirement.
Family conflict can also be an issue when relationships are under pressure from divorce, blended families, and personality clashes.
The death of a parent can also create disputes over the distribution of fund assets or forced asset sales. Decisions about the payment of death benefits by the remaining trustees can derail carefully made estate plans and result in expensive legal battles.
Larger families with multiple adult children and partners may also find the six member limit an obstacle, forcing them to look at other options such as running a number of family SMSFs in parallel.
If you would look more information about establishing a family SMSF, call our office today.
i SMSF quarterly statistical report June 2024 | data.gov.au
ii Related parties and relatives | Australian Taxation Office
iii Paying superannuation death benefits | Australian Taxation Office
Helping the kids without derailing your retirement plans
As parents, the instinct to support our children never truly fades, even when they become adults but when you are looking at giving them a financial helping hand there is a bit to consider.
It’s important to ensure any support you provide is not at the expense of your financial future. It can also be tricky knowing what form your support should take, in order to maximise the benefits for your kids.
Support in a challenging environment
In today’s financial landscape, many young people are struggling to get ahead in the face of skyrocketing housing prices and rising living costs and it’s increasingly common for parents to provide some form of financial assistance. In fact, more than half of parents with a child older than 18 provide financial support.i
So, if you are giving your adult kids a monetary helping hand, or considering it, you are in good company.
Achieving balance
The challenge for most people is the balance between helping your kids get a head start in life and making sure you have enough for a secure financial future.
It’s important to have clear visibility of your own financial situation, of how much you’ll need to fund the retirement you aspire to, and how much you can comfortably spare. If your financial future is secure, you’ll be in a better position to help your children when they need it most, so ensure that any contribution you make to your kids’ financial wellbeing is not at the expense of your superannuation and other retirement savings.
Ways of providing support
When we think of support we often think of the ‘bank of mum and dad’ helping with a home purchase and that is quite common, with 40 per cent of new home buyers getting a hand from their parents. ii
If you’re considering this route, you have several options:
Gift funds: If you have the means, you can gift your child a portion of the deposit, however, be mindful of any tax implications.
Going guarantor: Another popular option is to act as a guarantor on your child’s home loan. This means that you’ll use the equity in your own home to guarantee the loan, which can help your child secure better borrowing terms. It’s a significant commitment, so be sure to discuss the potential risks and implications thoroughly.
Co-ownership: In some cases, parents and children can purchase a property together, sharing the financial responsibilities. This arrangement can be beneficial, but it’s crucial to have a clear agreement in place outlining each party’s responsibilities and financial contributions.
Other ways of providing financial support
There are lot of other ways you can help your kids with a range of expenses. Nearly 40 per cent of parents pay for their adult children’s groceries and around the same proportion allow their adult children to live at home rent-free, while around a third pay their adult children’s bills. One in five fork out for their kid’s car-related costs like registration fees and petrol and 20 per cent pay for their kids to take off on holidays.iii
Non-financial support
Financial assistance isn’t the only way to support your children. Often, your time and knowledge can be just as valuable. Encourage them to develop good financial habits, such as budgeting, saving, and investing. You might even consider involving them in family discussions about money management, which can empower them to make informed financial decisions.
Communication is critical
Regular, honest conversations about finances can strengthen your relationship with your children. Discuss their financial goals and challenges openly and encourage them to share their aspirations. These dialogues will allow you to gauge how best to support them and sometimes, just being there to listen can make a world of difference.
Setting clear boundaries is also crucial when offering financial support. Discuss how much you can provide, whether it’s a one-off gift, a monthly allowance, or a loan. By being transparent about your limits, you can prevent misunderstandings and help your children set realistic expectations and become financially independent.
Navigating the complexities of financial support can be challenging, especially when balancing your own needs with those of your children. We can provide assistance and advice tailored to your unique situation and help you create a sustainable plan that allows you to assist your children without compromising your retirement goals.
i Finder Bank of Mum and Dad Report | Finder
ii https://www.apimagazine.com.au/news/tag/deposit
iii Bank of Mum and Dad slightly less generous than before COVID-19 crisis, survey shows | Domain
Insuring against loss of income
Protecting income from unexpected illness and injury is particularly important to anyone with a mortgage to service, small business owners and self-employed people with no sick leave available.
With income protection insurance, you can be paid some 70 per cent of your income for a specified period to help when you cannot work.i
The most common claims are for illnesses such as cancer, heart attack, anxiety and depression.ii Payments generally last from two to five years although you can take a policy up to a certain age, such as 65, and the amount is generally based on 70 per cent of your income in the 12 months prior to the injury or illness.iii
For some, income protection insurance may be part and parcel of your superannuation although more commonly this is limited to life insurance, and total and permanent disability cover. But, if you do have income protection insurance in your super, check the extent of the automatic cover as it can be modest.
Alternatively, you could take out a policy outside super where you will enjoy tax deductibility on the premiums. Income protection insurance is the only insurance that is tax deductible. Other life insurance products outside super such as trauma insurance are not tax deductible.iv
Work out a budget
There are many considerations when looking at income protection insurance and the best place to start is to work out your budget, thinking about how much would you need to maintain your family’s lifestyle if you are unable to work. Then you are able to decide on the appropriate level of income protection insurance as well as other factors that affect premiums such as how quickly you might need the payments to start and how long these payments will last.
Many people think income protection insurance is expensive, but you can fine tune policies to suit your budget by changing the percentage payment amount, the length of time for which you would receive the payment and how soon you start getting a payment once you cannot work. Reducing these parameters can reduce your premiums.
Check the policy details
It is important to be mindful of a number of factors that might affect the success of any claim you might make. So, make sure you read the product disclosure statement.
Every insurer has a different definition as to what will trigger a payment, so you need to understand the difference between “own occupation” and “any occupation” for cover. For example, if you are a surgeon and lose capacity in one of your hands, you will receive a payout from your insurer if you have specified “own” occupation because you can no longer work as a surgeon. But if you opt for “any” occupation, then the insurer could argue that you could still work as a doctor just not as a surgeon and the claim may not be paid.
It is also wise to understand that if your policy does not seek your medical history, it is likely there could be limitations to what illnesses are covered.
Another consideration is whether you have stepped or level premiums. Stepped premiums start low and usually increase as you age. Level premiums begin at a higher rate but typically don’t increase until you reach 65. In the long run, level may work out cheaper for some.v You must work at least 20 hours a week to take out income protection insurance and you can usually only buy a policy up to the age of 60. Also, if you receive a payout, you need to declare that income on your tax return.
If you want to check that you have sufficient cover to protect you and your family should you lose your income, then give us a call to discuss.
i Income protection insurance | Moneysmart ( moneysmart.gov.au)
ii The Most Common TPD Claims in Australia with Examples | Aussie Injury Lawyers
iii Income protection insurance | Moneysmart ( moneysmart.gov.au)
v Income protection insurance | Moneysmart ( moneysmart.gov.au)
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