Is a shared self-managed super fund a smart wealth move or a future legal nightmare?

Self-managed super funds, or SMSFs, can prove enormously beneficial for families, friends and business partners, but they can also become problematic if members disagree on strategy … and disastrous if they end in expensive legal fights.

A parent, for example, who’s receiving a pension from the fund and wants to retain investments that provide more income, or cash out, can argue with children who want to stay in and prioritise longer-term capital growth.

Then there are often family feuds after a death. In one case, a daughter disagreed with her father’s wish to split his death benefit equally and used her trustee powers to pay it all to herself. In another, surviving family members clashed over the payment of SMSF death benefits compared to amounts received under the deceased’s will.

Michael Hallinan, SuperCentral special counsel – superannuation, has seen it all over the years, but says there are sensible strategies for avoiding disputes.

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“It’s almost like a joint venture and should be approached in the same way,” he says. “Sometimes, a single-member SMSF is the safest fund of choice, as with a three-member fund, two members can outvote one, and a four-member fund can end up in a deadlock.

“But you can allow trustee decisions to be made by a simple majority rather than unanimously, provide a casting vote to one person, or voting rights can also be allocated on the value of a trustee’s account.”

The major problems occur when people are excited about going into a fund together and don’t stop to put planning rules and parameters in place for decision-making later on, says Shore Financial chief executive Theo Chambers.

“The difficulty is when people are of different ages, and have different appetites for debt,” he says. “Some people want to pay out, and some want to reinvest the profit, and some want to sell, and others want to hold.

“You need to think about what’s going to happen in the case of death or divorce, or incapacity, or when adult children enter the fund. You should have a documented process for decision-making, the same as in a shareholders’ agreement.”

Most disputes flare up around blended families, invalid paperwork – especially with binding death benefit nominations – trustees acting in self-interest and SMSFs sitting outside wills.

Steve Palise of Palise Property Buyer’s Agent says that when people ask him whether they should go into an SMSF with a family member, he reminds them that 50 per cent of marriages end in divorce.

“Apart from falling out, people can get sick, change or lose their jobs, move, have new partners,” he says. “I often recommend against it. But if they want to, you tell them they need to see a good property solicitor to set the rules, and they’ll often say, ‘No, I’ll be fine!’

“Yes, they might be fine now, but in three, five, seven or 10 years, things can be very different. So it’s important to set up a proper contract and treat it as if you’re dealing with an enemy. Because, in litigation, often the partner of a family member can become the worst enemy.”