Helping the kids and grandkids

After years of raising a family, it’s not surprising many retirees want to maintain their legacy of generosity by offering a financial helping hand to their children… and grandchildren.

A helping hand for the grandkids - is it the right decisions?

Small steps like paying a youngster pocket money or offering gifts of cash on birthdays can mean a great deal to young children. But sometimes grandparents want to go further and extend that level of support. 

Giving is great but be sure you don’t compromise your own financial security. If you’re in your sixties or seventies, you could easily live to your nineties. That’s a long time to make your investments last, so do be sure your generosity is within your means.

Spending your kids inheritance vs leaving a windfall

Some Australian seniors have become ‘skiers’ – no, they’re not taking to the slopes. SKIers are those who plan to ‘Spend the Kids Inheritance’. It means intending to exhaust all your wealth during your lifetime without leaving a bequest to your children. 

Certainly, without the need to leave assets behind, you could probably have far more cash to spend in retirement. But many Australians still have a strong desire to leave something for their children. Once again the key is to address your own needs first. No adult child wants to see their parents living a hand to mouth retirement lifestyle and you shouldn’t feel under pressure to leave an estate behind, especially if you’re struggling to fund your own lifestyle.

Investing for the kids and grandkids

One way to help your children or grandchildren financially is by kick-starting an investment in their name. It could be a savings account or a portfolio of shares. One thing you need to be aware of is that children can be taxed heavily on investment income including interest earned on savings accounts. So don’t go overboard – you could just create an unwanted tax liability.

Paying for the 'grandkids' education 

One practical way to help both your children and their children, is by contributing to the cost of your grandchildren’s education. It’s a financial helping hand many families would appreciate and it can help maintain a family tradition of children attending a particular school.

In addition to contributing directly to the cost of school fees, grandparents can also build investments specifically tailored for education costs. Education savings plans can be a tax effective investment when used for education purposes, while with investment bonds — another savings option for grandparents — withdrawals are usually tax-free after 10 years.

The downside of these investments is that they can be restrictive. Your grandchildren for instance may decide to leave school earlier than expected.

Handing over an early inheritance

An alternative may be to give children their ‘inheritance’ before you pass away. This an area where it pays to seek financial advice. Gifting an asset like, say, property to an adult child could trigger a stamp duty and/or capital gains tax liability.

If you are an age pension recipient or planning to retire within five years, gifting significant sums of cash or assets can jeopardise your age pension payments.

A single person has a ‘gifting free’ area of $10,000 per financial year, limited to $30,000 every five financial years. A couple has a total combined gifting free area of $10,000 per financial year, limited to $30,000 per five financial years.

If the total of gifts made in a financial year exceeds $10,000 (or $30,000 over five years), the excess will be assessed as a deprived asset.  What this means is that the excess amount is treated for Age Pension, and other social security purposes as if it is still your asset for five years. 

Consider your estate plans

It is important to have a valid will so that your assets are distributed in accordance with your wishes after you pass away. If you do not have a valid will, your assets are distributed according to the laws of intestacy, which may not reflect your wishes and make your estate more complicated to administer. Good advice is important here, especially if you have a large family or blended family. Disgruntled beneficiaries may challenge your will so it makes sense to discuss your will with both your solicitor and your family.

If you have money in super, in most cases your will doesn’t determine who receives your benefit. Ask your adviser about completing a binding death benefit nomination. This will state who you would like to inherit your super when you die. If you don’t have a valid binding nomination, it is the trustee of the super fund who will determine who gets your super benefit. Also think carefully about who you want to receive your benefit. Dependents (as specified under the tax definition - which excludes children aged 18 or over) generally receive your super tax free where  non-dependents can pay tax on inherited super so good advice can help your beneficiaries get more from your estate rather than losing a chunk to tax.

Climbing the property ladder - should you help?

Saving for a first home can be challenging for your kids or grandkids and there are several ways to help – each call for careful consideration.

One option is to chip in with a deposit. As we noted earlier, this could be perceived as a gift and affect your age pension entitlements. Even if you are a self-funded retiree it may not get your kids over the line, as lenders want to see proof of genuine savings. You could lend your children some or all or the purchase price, however, this could also affect your age pension entitlements. It is a good idea to also seek legal advice in relation to security for the loan to formalise any private lending arrangements.

Another option is to act as guarantor for your child’s home loan. Agreeing to be guarantor means you accept responsibility for paying off the loan if your child cannot keep up the repayments.

Some lenders will let you nominate the amount of the loan you wish to guarantee but nonetheless, the risk remains that you could find yourself facing hot financial waters if, for whatever reason, your child doesn’t make the repayments. 

Think it through

The bottom line is that we all want to help our children, and grandchildren. But don’t risk your own financial security in a bid to help others. That’s not to say you can’t lend a financial helping hand. Just speak with an adviser first so that you can decide the best way to offer support that benefits everyone.

Next: Financial benefits for seniors

There is a whole world of benefits seniors can tap into – from extra income to valuable discounts. Check out what’s available to help you get more from your retirement.
Ageing is a natural part of life and just as we plan for early milestones like buying a home or the arrival of kids, it’s worth laying foundations for old age.
While gifting some of your assets or retirement savings could help your family financially, bear in mind, could also impact your age pension.
While many believe estate planning to be simply writing a will or a trust, there’s more to include so that your assets are transferred as you'd like them to be.
Eventually, many of us may find we are called on to help ageing parents and other relatives. While that time may bring a range of challenges, from emotional to physical, planning ahead can help relieve some stress down the track.

This information is current as at 15/08/2016.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. 

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

The taxation position described is a general statement and should only be used as a guide. It has not been prepared by a registered tax agent under the Tax Agent Services Act 2009. It does not constitute tax advice and is based on current tax laws and our interpretation.  Your individual situation may differ and you should seek independent professional tax advice from a registered tax agent about any liabilities, obligations or claim entitlements that arise, or could arise, under a taxation law.

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