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 option is 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.
How gifting works
Your first thought might be to give your child a sum of money – for example, to put towards a house deposit. When you give away your assets for free, or transfer them to someone else for less than their market value, Centrelink refers to this as ‘gifting’.
Your child generally won’t be taxed on this kind of gift unless they decide to invest the money. However, you need to be careful if you’re currently receiving a government benefit that’s calculated based on your income or assets, such as the Age Pension. In this case, there are strict limits on how much you can gift to other people, including your children.
Whether you’re single or a couple, the gifting limit is $10,000 in any one financial year, with an additional limit of $30,000 in any five consecutive financial years. For example, if you made gifts of $10,000 each year for five consecutive financial years you would exceed your gifting limit in the fourth and fifth year. Going over these limits could affect your Age Pension or other Centrelink entitlements.
If you make a gift that exceeds these limits, you need to tell Centrelink within 14 days. Any gifts you’ve made in the past five years that are over the gifting limit can also be assessed under the income test and assets tests. So it’s worth speaking to your financial adviser before gifting to see if it might impact your benefits.
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.
Investing 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 your accountant and financial adviser 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 (within limits) 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 purchase the bond in the child’s name if they’re at least 10 years old. You may also be able to purchase the bond in your own name and then transfer ownership, without capital gains tax consequences, once the child 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, if the child makes a withdrawal from an insurance bond before the age of 18, they’ll be charged a high penalty tax rate. 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.
Also, remember that if you’re transferring any assets into a financial investment for a child or grandchild, the Centrelink gifting limits apply ($10,000 per financial year, limited to a total of $30,000 in five consecutive years).
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 someone immediately, such as your financial adviser or someone else you trust. You can also visit ASIC’s MoneySmart website to find contact details for a range of organisations that help victims of financial abuse.
Your adviser can also help with all your estate planning needs. They’ll clearly explain your options so you can help your loved ones – now and in the future – while still enjoying a comfortable lifestyle yourself.