Giving Now or Giving Later

19 Nov 2014

By Campbell Sorell

Everybody knows you can't take it with you, but the bigger question is - when should you give your money away and how much should it be?  It's a question wrapped up in emotion, philosophy and financial planning. It's no small issue, especially with the passing of inheritance to the next generation expected to be the largest in history with some estimates putting it at over a trillion dollars.

Many baby-boomers have or expect some inheritance. Those same boomers are now grappling with the question of when do they hand that money to their kids and whether they pass on money during their lifetime.

Some of the old paradigms of inheritance are changing.

If you wait until you die to give away your money to your children, they'll probably be too old to get much enjoyment out of it because they'll be close to retirement themselves.

Should You Give Now or Later?

There are both financial and emotional benefits and pitfalls to early inheritances and passing on money to your family while you're still around to enjoy the experience.

Why You Should Give Early

There may be tax benefits

For extremely wealthy individuals, there's an obvious upside to giving early - if they don't, they may be facing additional tax. Early inheritances can be an effective tool for shrinking an estate to avoid tax, and to make sure that more of your money actually reaches your loved ones, instead of going to the government in the form of taxes. This may include minimising potential death benefits tax, which is a 17% impost on a superannuation fund's taxable component when it is paid to adult children.

You get to see it

If you know that your own retirement is well in hand, there can be joy in giving to your loved ones while you're able to witness the fruits of your labour.

Be it bringing together the family for an indulgent holiday, helping pay off your children's mortgage or telling your grandkids they don't need to worry about secondary/tertiary education costs, many retirees derive satisfaction from spending some of their wealth on loved ones.

If you are a parent who worries about what your wealth will do to your children, you are not alone. Many people want to leave money to their kids, but they are concerned that their children are ill-equipped to handle sudden wealth. Some worry that by providing too much money, it will rob their children of the ambition and hard work that it took for them to amass the wealth. And it's not just parents who worry.

Money can cause some to lose their drive and ambition, but with the proper work and structure, those who inherit can use the money as a tool to create meaningful lives of their own. If you are concerned about gifting or leaving your children an inheritance, consider the strategies outlined below.

Give your kids a financial test

Some parents gift money to their children without any restrictions or rules and then sit back to watch what happens. How will your children handle a $1 million inheritance? Why don't you see what they do with $50,000 first? Do they save it? Do they ask for help? Do they pay off debt? Do they blow it on a holiday?

Use incentives with family trusts

The fear of many parents is that too much money can squash their children's drive and that these kids would be robbed of zeal to make an impact. This drive is what pushed the parents to make their own mark on the world. The solution for many parents is to use incentives within a family trust rather than leaving a large inheritance outright. The incentives can be creative and one example is for trust distributions to match the child's income.

Tie distributions to ages and events

Think back to when you were in your early twenties. Would you have been emotionally and intellectually mature enough to handle a large inheritance? Many parents create family trusts so that their kids get a small amount of money each year and larger amounts when they reach certain ages (eg 30, 35, 40). They will also allow for trust distributions to pay for 'stages of life' expenses, such as university fees, weddings, or home deposits. One popular strategy is to distribute income from the trust assets when the children are young and then to distribute principal when they are older when they, ideally, have a career and greater financial sophistication.

Get your kids involved in a personal foundation

Creating a personal foundation can be a great opportunity to support causes you believe in, derive a tax deduction, and, more importantly, teach kids about money.

Give without giving cash

There is another win-win alternative to outright gifting. This includes directly paying down either an adult child's mortgage principal or university (HECS) loan. This will make a significant difference to their future financial position, while not putting that amount of cash in their hands today. Many parents realise that mortgages are substantially larger now than in their time, so helping to reduce that huge burden is a rewarding proposition for both generations.

As a parent, you want what is best for your children. It's natural and reasonable to worry how a large inheritance will affect their drive and choices for life. With some planning, money can be a tool that enriches their lives rather than an anchor that drags them down. Consider the strategies above and connect with your financial adviser for more ideas and assistance to implement an appropriate solution.

To learn more about Campbell, view his online profile.​

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