By Zac Masters | August 6, 2021
We are living longer and longer, and therefore, people are receiving inheritances much later in life. No longer are people receiving inheritances when trying to save for a first home or raise a family. The Gratton institute completed research that showed that the most common age bracket for receiving an inheritance from parents was between the ages of 55 and 59.
With this in mind, more and more people are looking into the idea of gifting an early inheritance to help their children, grandchildren, nieces, nephews or other family members in the earlier stages of their life where they may not be as financially secure as possible. In this blog, I will run through the things that you should be thinking about when looking to gift an early inheritance.
When looking at gifting funds, one of the most important things to ensure is that you will have enough funds to live the life that you want to live. We do this for clients through financial modelling, looking at the available assets and whether or not that is enough to reach your desired level of income until far past your life expectancy. You don’t want to be in a situation where your gifting will leave you financially vulnerable at some stage in the future. If you don’t want to see a financial adviser, some online retirement calculators may be helpful.
There are things you have to think about that can affect you and your wishes for these funds. The first one to consider is the Centrelink implications. If you are thinking of gifting an amount to mean you will receive Centrelink, you may need to reconsider. You can gift up to $10,000 per year to a maximum of $30,000 over a five-year period. Any amount over this will be included in the assets test. This also means that if you are currently receiving a part pension, you likely won’t increase the amount you receive by much by gifting. You will also have fewer funds invested, earning money for you, leaving you in a potentially poor financial position.
Another potential trap to be aware of is that if you were to make a gift to someone during your lifetime, then that gift becomes a part of the marital pool of assets that is available for division between the person you are gifting the funds to and their spouse if there was a relationship breakdown. You might love their spouse and be alright with this, but that’s usually not the case. For instance, if you are giving your child $100,000 to help with a home deposit and they have a partner, and in the future, they split, $100,000 would likely be included in the assets divided when they separated. Essentially, your child could end up with only half of the gift in the future, which may not be ideal.
There are different ways around this by potentially getting your child and their spouse to sign a binding financial agreement prior. Another option is to make a properly documented loan to the child rather than a gift. If they were to go through a split, you can recall the loan and the amount you lent them, which means the funds should not be available for division. The loan can also give protection if your child was to be sued in the future or if their business was to go under, the gift wouldn’t be available to creditors. If a gift is something you are looking into, it’s always prudent to get legal help.
Suppose you have decided that a gift is appropriate and something you want to do. You want to make sure that the gift is as beneficial as possible. I may be biased, but it’s always good to get financial advice if you’re giving a decent-sized gift. You may even want to potentially fund a financial plan as part of that gift so the beneficiary can get advice about utilising the funds as efficiently and effectively as possible.
If you are gifting funds for a first home, should they be utilising the first home super saver scheme? If the funds are for a new grandchild’s future education expenses, should those funds be invested via an investment bond? These are things that should be thought of and what a financial adviser will help you with. It will mean that your gift goes further and leaves the beneficiary in a much better financial position, which is usually the goal.
I am finding that with clients, the idea of gifting an early inheritance is becoming more and more popular. Helping someone you love financially can be a great thing if you have the resources available to do so, and many people get a lot of joy from being alive and able to see their loved ones put the gift to the best possible use. But, as with anything, there are pros and cons you need to way up. You should always lean on your team of advisers, be that financial, legal or otherwise, to help you make this potential goal of yours a reality without falling into any of the potential traps.
As always, if you have any questions, feel free to email me at zac@pekada.com.au.
Zac is a qualified financial planner at Pekada and host of the Wealth Collective Podcast. Living in Melbourne, Zac has six years of experience in advice and specialises in wealth accumulation and protection strategies. He loves to keep his finger on the pulse for the best strategies for wealth accumulators looking to build and protect their wealth tax effectively. Zac has been featured as an expert in Money Magazine.