Consider this before giving your children financial help

Written by Annette Sampson for Australian Seniors. Here, she interviews financial planner Laura Menschik.

Wanting to help your children and grandchildren financially is a natural instinct. Why make them wait for their inheritance when they would benefit from the help now? But experts say that care needs to be taken, as decisions made today can affect your own future financial security. Here are some commonly-asked questions, and what you need to consider.

Question: My children will inherit my assets but they need money now. How can I help them now?

“You should only give money that you can afford and know you won’t need in the future,” says Laura Menschik, certified financial planner at WLM Financial Services. “You have to be prepared financially to never get that money back.”

While you may be able to afford it now, she says, you need to think about your future financial needs such as whether you will need money for aged care.

 “I know of people who have helped out and ended up with almost nothing,” she says. “They have wanted to retire and find they can’t.”

While helping out with expenses occasionally is something most parents do if they can afford it, Laura says she would always recommend giving children a loan rather than a gift when it comes to more substantial amounts. “If the money is a gift and their partner leaves, they [the partner] could ask for half the apartment that you put $200,000 into,” she says

You should have a written loan agreement, Laura says, but you can set the terms to benefit your child. For example, the loan could be made interest-free or at a nominal rate of interest, but if your child’s relationship broke up, the former couple could be required to repay the amount in full, plus interest.

If you have more than one child, fairness also comes into the equation. “You can feel guilty if you help out your son – and then your daughter wants a holiday house,” she says. “I’ve seen people who have helped one child more than another and when the parent died it caused so many difficulties. The siblings said it was unfair that ‘Joe’ had already got ‘$X’ and now wanted his share of the inheritance.”

She says you should talk to your family before helping one child. A written loan agreement can also avoid these problems, through measures such as forgiving the unpaid loan as part of the child’s inheritance. 

Question: I’d like to give my granddaughter the deposit to buy her first home. Will that affect my pension?

Centrelink has special gifting rules to deter people from giving money away to qualify for the age pension. It says you can only give away $10,000 in one year, or up to $30,000 spread over five years, without any effect on your pension. 

In amounts over this, it says, you will still be treated as though you have held onto the money for five years. So the excess over the limit will be included in your assets for the pension assets test, and you will be deemed to have earned income on it for the pension income test.

The allowable gifting amount applies to both singles and couples (so your partner can’t ‘top up’ your granddaughter’s deposit, for example), and it also applies to gifts made in the five years before you apply for a pension.

Question: Are there any tax consequences in giving money to my children or grandchildren?

Laura says neither you nor your children need to pay tax on gifts, though if you sell an asset such as an investment to fund the gift, you may be liable for capital gains tax on any profits you make from the sale.

However, if you want to set up a fund to finance a future expense, such as a grandchild’s education, you do need to consider the tax consequences. She says minors are subject to penalty tax rates on investment income, so an adult will need to hold the fund in trust for them. The adult will then be taxed on income from the fund.

“If you are retired and on a very low tax rate that may be fine,” she says. “But if you’re still paying tax you may want to consider something like investment bonds, which pay tax at a maximum rate of 30% within the fund, and you can start drawing it down with no tax after 10 years.”

Question: Can I get around the gifting rules by selling my home or other assets to my children at a reduced price? 

Centrelink says gifting also includes assets that are sold or transferred for less than their market value. So if you owned a home worth $380,000, and sold it to your children for $200,000, it says $170,000 would be regarded as a gift and used in calculating your pension entitlement after allowing for the permissible $10,000 gift. 

Question: My son needs money and has made the suggestion that I sell my house and move in with his family rent-free for the rest of my life. I trust him, but is this a good idea? 

Again, Laura says, you need to consider what might happen in the future, especially if your child’s marriage breaks up. “You would be losing your independence,” she says. “I’d generally advise looking at other ways you could assist, but it gets down to the relationship you have with your child and their partner. You shouldn’t feel forced and you need to look at all the ramifications and definitely seek professional advice.”