Why do it?
The big attraction with six-member funds is that it brings more capital into the fund. Which gives the fund access to investment opportunities otherwise not available to it.
Scale is not a factor for traditional retail and industry funds. So the biggest opportunity will be property investment. Which, given the current market, is a compelling reason to pool capital. And there is no doubt that property has been a good long-term hold for many SMSFs.
Note: SMSFs are not a suitable vehicle to pass assets down through the generations. Once Mum and Dad die the money must come out of super as a death benefit. It can only be retained in an SMSF if the children are financially dependent. And there are strict criteria around that.
For existing funds that want to move to six members:
- Check the trust deed to make sure it allows for more than four members. If not there will need to be a deed amendment.
- Update asset ownership records to reflect six-trustees.
- Consider moving from individual trustees to a corporate trustee.
-It gives more flexibility and does not require any changes if members come and go; whether due to death, divorce, or a falling out.
-It also makes making updates to ownership registers easier.
Management challenges to consider:
Decision making and dealing with conflict.
With up to six members there will need to be clear guidelines for the trustees about how they manage this. How do they agree on a course of action? How will they agree about investment decisions?
It comes down to the trust deed and the fact that the trustees have a duty to act in the best interests of all members.
Investment strategies become even more important.
Are these understood by all trustees? Have they been reviewed and carefully considered? Has there been upfront advice with a long-term plan and pro-active issues management?
Insurances will matter.
These likewise become more important. As it is likely that the fund will be dependent on one or two contributors. Decisions made need to be documented.
This is particularly important for funds with sticky assets like property, unlisted property trusts and private investments.
These assets might be hard to liquidate. Often constrained by long-term investment horizons, they could cause a loss to the fund if sold quickly.
Underpinning all of this is that a six-member fund is necessarily more complex. More people, more opportunity for things to fall apart. In which case it could become a litigious nightmare if not done properly.
A history lesson
Go back 30 years and it was common for employers and even towns to set up superfunds for employees and citizens.
Prima facie a generous thing to do. Except that people leave and want to take their super with them.
And fund directors struggled to manage this. It became a recipe for disaster as complaints and lawsuits piled up. So much so that from the late 1990s APRA systematically shut them all down.
The best of intentions unravelling in the morass of individual desires.
So be mindful of six-member SMSFs. They need to be thought through to make them worthwhile.