Should you be sharing your super with the kids?
According to the latest research from REST Industry Super, working Australians aged over 50 are very much in the habit of making financial contributions to their kids. So far they’ve shelled out $31.6 billion for home deposits, $55.9 billion for education and nearly $10 billion for wedding expenses1. So is funding major life events for the next generation affordable? And what happens when you want to help but you’re no longer earning a salary?
We talked to CERTIFIED FINANCIAL PLANNER® professional Anne Graham, principal financial planner at Story Wealth Management, about what you need to consider when you’re looking at helping kids with their finances.
In your experience, are more retired people looking at helping kids financially nowadays?
Should you be sharing your super with the kids? Parents are coming forward more often to provide financial help to their adult children. It’s usually to help them avoid the ongoing burden of a HECS debt, buy a home in a market that’s seen property values rising fast in recent years or pay for private education for grandchildren. They want to enjoy seeing their kids benefit from their wealth before they pass away.
Generally, it’s parents that are offering to help rather than the kids asking for it. In a few cases an adult child might reach out to Mum and Dad if they’ve had health issues and haven’t been able to work and need some money to tide them over.
When you’re giving money to your kids, what are some of things you need to consider?
If you’re intending to provide financial assistance as a gift, you really need to ask yourself if you can you afford it. And if you want the money to be used for something very specific, you’re often relying on trust between you and your kids that those wishes will be honoured. In some cases, you wouldn’t want to go to the trouble of getting legal advice to make sure a gift is spent in the way you intend. But there may be circumstances when it’s important to get some kind of contract drawn up. If your son or daughter were to get divorced for example, would you be OK with their ex-spouse getting half of your gift, or half of the home you helped them buy?
When you’re offering money as a loan rather than a gift, it’s well worth organising a contract to avoid expensive and awkward disputes down the track. One client of mine put money towards her daughter’s holiday house. When the house sold, my client agreed to rollover her share of the equity into another property. This second property was then sold for a capital gain, so my client asked her daughter for her 20% share of the sale price. But her daughter says her mother’s contribution was for sharing access to the property as a holiday home, not as an investment. And now my client is seeking legal advice to recover the money she had expected to receive.
Whether the money is a gift or a loan you need to decide where to draw it from. If you end up turning to your investment portfolio, then timing and tax are both important considerations. If you sell assets at a time when they’ve just lost value, you might be losing out on potential earnings. And there’ll be capital gains tax to pay if you realise a profit on your original investment, so you’ll need to factor this in to the overall cost of your gift.
Another issue for many parents is being fair and equal to all their children. Perhaps you’d like to give one child a sum of money because they really need it, but can’t afford to gift the same amount to another child or children. Changing your estate plan to reduce your bequest to a child by the amount you’ve gifted to them can be one way to go about it. You’re effectively providing an advance on their inheritance so they get the financial help they need straightaway.
Can a monetary gift to your kids affect your eligibility for government benefits?
If you receive the age pension you can gift up to $10,000 per financial year and up to $30,000 in total over five years without any impact on your eligibility. But any money you give away in excess of this threshold, will still count towards your assessable assets for the next five years. So it can affect your entitlement to the age pension and government subsidies towards aged care. So it’s really important to know that when you give away a large sum of money to your kids, you won’t have access to earnings from that capital and those earnings may not be replaced by higher Centrelink payments, depending on the sum involved.
How can a planner help when it comes to making a financial contribution to your kids?
It always comes back to the same question – can you really afford it? A planner can help answer this by discussing your future income needs and doing some modelling to see if you can give money away and still fund your retirement. When you’re faced with the reality that paying off your children’s HECs debt means that your retirement income will run out 10 years sooner, it gives you a different perspective on your choices.
More often than not, parents can’t really afford to help out their kids as much as they think they can. They get this sense of being very wealthy when they get access to their super because it’s usually the largest sum of money they’ve ever saved. But it’s typically going to have to last for 25 years or more. And if it does run out, it could be you relying on your kids for a roof over your head or a handout. Having said that, some families have a great way of passing money between the generations, with parents giving interest free loans to their kids, knowing their money is helping them at a critical time. And then in future years, the next generation will make sure their parents are provided for.
A CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on planning for your financial needs after leaving work so you have enough income to last you throughout retirement.
1 Australian Financial Review, One in 5 Baby Boomers to retire with mortgage debt, Alice Uribe, 2 May 2017, http://www.afr.com/personal-finance/superannuation-and-smsfs/one-in-5-baby-boomers-to-retire-with-mortgage-debt-20170502-gvwzej#ixzz4g5IJ7GkP
Online source: Produced by The Financial Financial Planning Association of Australia and published on 18 May 2017. Original article.
