It's natural to want to give your children a financial helping hand, but make sure you don't compromise your own financial future.
Some older Australians want to share their wealth while they're still alive, rather than waiting to leave it in their Will. That way they can enjoy helping their children buy a home or paying for their grandchildren's schooling.
There are plenty of ways to give your family members a financial boost. Each has its own benefits and drawbacks, so think carefully about which options are right for you.
And while it's great to see your loved ones benefit from your help, you need to make sure you'll have enough money left for yourself. You should also be aware of the tax implications of transferring your wealth while you're alive versus through your estate.
How gifting works
Your first thought might be to give your child a sum of money – for example, to put towards a house deposit. This is called 'gifting', and basically means giving your assets for free or for less than their market value. Your child generally won't be taxed unless they decide to invest the money.
Gifting doesn't usually mean covering a one-off expense – such as buying a fridge or plane tickets – or paying for services like babysitting. However, there are strict limits on how much you can gift to your children.
Whether you're single or a couple, the 'gifting free amount' is $10,000 for one financial year or $30,000 within five consecutive financial years. Going over these limits could affect your Centrelink entitlements such as the Age Pension.
If you make an assessable gift, you need to tell Centrelink within 14 days. Any gifts you've made in the past five years can also be assessed under the income or asset test.
As well as cash transfers, other gifting examples include:
- handing over a business or trust
- selling an investment property to your child for less than it's worth
- buying your child an expensive item like a car
- paying your child's loan where you acted as the guarantor
- putting money directly into a family trust that you don't control
- 'forgiving' a loan your child hasn't repaid to you.
To lend or not to lend
If your child is working towards a financial goal, or they're having money problems, your natural instinct may be to give them a loan. The golden rule is not to lend money that you can't afford to lose; after all, you don't want to put your own financial wellbeing at risk.
If you lend money to a loved one, charging 0% interest can be a tax-effective option because the repayments won't affect your tax position. And since it's a debt, the loan amount isn't counted towards your child's assessable income.
As long as there's a clear intention for the money to be repaid, a no-interest loan isn't considered a gift. You'll therefore need to properly document the loan, even if it feels strange to do so between family members.
We can help you draw up a loan agreement, which should include the loan amount, its purpose and the repayment deadline. It's also worth specifying what will happen if one of you dies, your child and their partner end their relationship, or you need the money back sooner. This can help avoid potential conflicts later.
Invest in their future
Gifting shares is another way to help out your kids or grandkids. But rather than giving them money for something specific, it's about providing a financial foundation that will potentially grow in value over time.
Minors usually can't buy or sell shares – so if your child or grandchild is underage, one option is to hold the shares in trust and then transfer ownership when they turn 18. But remember, you may be liable for capital gains tax if the share value increases between the purchase date and the transfer date. You also need to consider the tax implications of any investment earnings, so it's worth talking to us first.
Another option is to take out an insurance bond – also known as an investment bond or growth bond. As with managed funds, insurance bonds offer a range of investment options and you can add to the investment over time.
Earnings are taxed at 30%, which may be lower than your marginal tax rate. You'll also be taxed on any amounts you withdraw, but all withdrawals are tax-free once you've held the bond for 10 years.
Most insurance bonds allow you to transfer ownership once the recipient reaches a nominated age. This means your child or grandchild can directly own the bond without the tax liability associated with other investment options. However, insurance bonds are designed to lock away the investment for at least 10 years, so it might not be a suitable option if the money will be needed before then.
Put yourself first
Any financial decision you make for your family can have a major impact on your own financial security. So no matter how much you want to help your loved ones, it's important to consider your own needs. The last thing you want is to risk running out of money before your retirement ends.
Also bear in mind the emotional disruption financial matters can cause. For instance, if you give or lend money to one child but not another, this can lead to family tensions and even legal battles. Proper documentation is also essential, and should take into account all possible scenarios – for example, whether your child's spouse can make a claim for the assets in question if they get divorced.
Finally, it's vital that you don't feel pressured or even bullied into giving or lending money to family members. If you feel like this is happening, tell us immediately.
We can also help with all your estate planning needs. We'll clearly explain your options so you can help your loved ones – now and in the future – while still enjoying a comfortable lifestyle yourself.