By Bina Brown 12 Jan 2018 Australian Financial Review
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 oxygen mask before assisting others.
It doesn’t matter whether the money is 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 at 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.
Some people’s goal in life is to be seen to be helping their children, says Adrian Frinsdorf, William Buck director of wealth advisory.
“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 at the time,” he says.
The risk for parents is if they later find themselves short.
It is very dangerous, says Financial services managing director Suzanne Haddan, 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, says Haddan, but what you will need in the future.
“When modelling [financial outcomes] for clients, we look 30 years out and look at the likely living expenses they could face,” she adds.
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, Haddan calculates 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 where one needs to go into care. That’s because there are still expenses for the one living at home,” says Haddan.
By all means, help family out where it’s needed. But she
doesn’t think it is fair that someone should be asked to subsidise a lifestyle better than their own. “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?”
Financial gifts are all well and good but it is prudent to protect any advance and not leave yourself destitute, says Andrew Sinclair, Cowell Clarke tax and commercial partner.
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. This can be useful in proving their ability to repay a loan.
If those seeking the loan think the conditions set by parents are too onerous, he says. they can always seek a bank loan instead.
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).
However, you don’t have to receive the pension to be impacted by the rules.
Financial Planner Scott McAlees says a gift can be either money or the transfer of an asset such as buying your child or grandchild a car or (giving 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, says McAlees, Centrelink will deem the excess to be a “deprived asset” which will that amount will still count towards the asset test and income test.
The same gifting rules apply to someone going into residential aged care and the calculation of the means-tested care fee, meaning that money or assets given away that exceed the limits will still be counted as your own.
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 upfront. It may also prevent the recipient from thinking it is a regular thing, he says.
When it comes to life lessons, Haddan 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,” she says. “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 invest it on behalf of the child towards something like a home deposit. It helps teach younger people good money habits.”
“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 about the cost of living,” says Haddan.
Don’t play favourites
Making sure gifts are even between children and grandchildren is an important part of the process of giving assets away, says Smythe,
If it is the case that one person needs money now and others don’t, then death can be the equaliser.
“Wills have equalisation clauses which states that before an estate is divided between siblings, it will be equalised effectively depending on any loans or gifts,” he says.
Sinclair also likes to see provisions in wills that endeavour 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.
“Parents have to ultimately do what they think is fair,” he adds.
Haddan believes 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.
Bina Brown is a director of aged care placement company Third Age Matters.
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