Family gatherings at this time of year may trigger talk of early inheritance or financial assistance with upcoming expenses. But, as they say on the airlines; fit your own life vest before assisting others.
It doesn’t matter whether additional funds are needed to pay for living expenses, school fees or holidays; take the time to make sure no-one is bleeding anyone dry.
Parents in particular may be accustomed to opening their wallets to their kids but it shouldn’t be the expense of their own future needs, which in the case of aged care could be substantial.
Longevity and the expectation of an inheritance may mean people have to be extra careful with their generosity when it comes to others, says Minchin Moore adviser Ben Smythe.
“With the intergenerational transfer of wealth many children have over extended themselves and factored in an inheritance. At the same time parents are living longer and need to be looking at their own living arrangements,” he says.
Some people’s goal in life is to be seen to be helping their children, says William Buck director of wealth advisory Adrian Frinsdorf.
“There can be a lot of emotion involved with passing on wealth and so for that reason it can be very important for family members to take the money, even if financially they don’t need it,” he says.
The danger may be down the track if you find yourself short.
It very dangerous, says BFG Financial services managing director Suzanne Hadden, to think that if you give money to your kids now that they will give it back if you need it down the track.
“If you give a gift it is forever,” she says.
- Don’t leave yourself short
Retirement is not just about what you need now, but what you need in the future, says BFG’s Hadden.
“When modelling for clients we look 30 years out and look at the likely living expenses they could face,” she says.
Nobody knows what is going to happen in the future but if one of the scenarios is residential aged care, then it is important to be prepared. Aged care is expensive.
While not everyone will need to go into residential aged care, Hadden works out the maximum someone may require to pay for their care.
The means tested care fee, if applicable, is currently capped at $26,566 a year or $63,759 over a lifetime. There is also a mandatory basic daily care fee which is currently $49.42 a day.
She then considers what liquid assets they may have to pay the refundable deposit – which could be up to $1 million – to get in.
“It is a bigger issue to consider for a couple and one needs to go into care. There are still expenses for the one living at home,” says Hadden.
While she doesn’t think it is fair that someone should be asked to subsidise a lifestyle better than their own there can be plenty of room to help others out.
“If you don’t get to go to Fiji for your annual holiday should you be asked, in an indirect way, to pay for other family members?”
- b) Make it a loan
Financial gifts are all well and good but it is prudent to protect any advance and not leave yourself destitute, says Cowell Clarke tax and commercial partner Andrew Sinclair.
He suggests a family friendly loan structure which states the money can be recalled at any time with a set amount of notice.
It is up to you as to what interest rate, if any, is charged but the essence of a loan is that it can be recalled if necessary.
Charging interest is not only indicative of a genuine loan but it can be an opportunity for a child to repay it and use it to their advantage with any future bank loans, says Sinclair.
If those seeking the loan think the conditions set by parents are too onerous they can always seek a bank loan instead, he says.
A loan instead of a direct gift can also protect an asset in the event of divorce or separation and failed business ventures, the two common ways that family money disappears.
If you are giving someone money to put towards a home or into a business and it is structured as a loan then you will be paid out before the assets are divided – in the case of a relationship breakdown – or other creditors in the case of a business collapse.
- c) Beware Centrelink
Anyone receiving the age pension, in part or full needs to be aware of Centrelink’s gifting rules.
However, you don’t have to receive the pension to be impacted by the rules.
RSM Associate Financial Planner Scott McAlees says a gift can be either money or the transfer of an asset such as buying your child/grandchild a car or giving them yours; assisting with a deposit on a family member’s house; transferring some shares as an early inheritance gift or selling a house to a relative for less than the current market value.
Centrelink permits you to give away $10,000 in any one year, and a maximum $30,000 over five years.
If you go over these limits, Centrelink will deem the excess to be a deprived asset and they will continue to be used to calculate the asset test and income test, he says.
The same gifting rules apply to someone going into residential aged care and the calculation of the means tested care fee; money or assets given away that exceed the limits will still be counted as your own.
- d) Use it as lesson so kids aren’t always asking for money
Gifting money is one thing but the gift of knowledge is another.
“If someone has successfully created enough wealth that they can give some away then the recipient could also learn some life skills from that person, such as how to invest,” says Frinsdorf.
If the intention is to teach others how to invest then communicate that intention up front. It may also prevent the recipient from thinking it is a regular thing, he says.
When it comes to life lessons, Hadden is an advocate of charging anyone who is earning money and living in the family home board.
“There is no such thing as a free lunch. It is up to the parent or whoever is charging the money to decide whether they keep the money to cover their own living expenses or allocate and invest it themselves it for something like a home deposit. It is about helping younger people with money habits,” she says.
“It is not a question of whether you need it but if you retain 20-25 per cent of their wage then you are actually teaching a good life lesson,” says Hadden.
- e) Equality
Giving to children equally may be important but it doesn’t have to be at the same time, says Hadden.
“Someone might have a financial need now where another person is OK. Death can be the equaliser,” she says.
Sinclair likes to see provisions in a person’s Will that endeavours to treat kids equally. It may be that one child gets $500,000 while you are alive but a second child gets the same years later but it is adjusted for inflation, he says.
Hadden says gifting assets works best when there is transparency and everyone in the family is aware of what is happening.
“It is your money and you can do what you want, but you also want goodwill in the family,” she says.
Tis article first appeared in the AFR: