Helping your Children Financially: Hints and Tips
15 Jul 2019
By Shadforth Financial Group
We're often asked by clients how they can offer their children financial assistance without creating more problems than they may be solving. Common concerns include:
- Avoiding "spoiling" children
- Encouraging children to "make their own way" financially
- Keeping things fair between siblings
- Being able to afford the assistance
- Tax and Centrelink implications of gifts
- Should assistance be in the form of a gift or a loan?
- Imposing upon children's independence
- Hurting the pride of a child's partner
- Dealing with a possible relationship breakdown of their children.
Regardless of how much financial assistance you’re considering, your primary concern should be whether you can afford it. Typically, any surplus in cash would be reinvested (often outside the tax protected environment of superannuation) and accumulated to grow your estate. However, there may be situations in which your children need urgent financial assistance, or where it makes more sense to offer financial support now rather than as part of their inheritance.
If you’re thinking about helping your children financially, here are some tips for going about it the right way.
Decide on a loan agreement
If you’re giving your child money as a loan rather than a gift, it’s usually a good idea to write up a loan agreement that you both agree to. This can be a simple document that outlines the terms of the loan and how it will be repaid.
Having a loan agreement is especially useful if the loan is being given to your child and their partner. For example, the agreement might stipulate that in the case of a marriage breakdown, the money will remain within the "family" and not be dissipated to former in-laws.
The loan agreement could also provide that in the event of the death of the parents (the lender) the loan could be repaid by reducing the child's (the borrower) interest in the estate of the parents. This arrangement has the further advantage of allowing different loans to be made to different children over time. These loans can also be recorded in the list of assets so that they can be considered when an estate is being administered.
Stipulate how the money will be used
A second consideration is whether or not any conditions should be imposed on how the financial assistance should be utilised. Often, assistance can be directed towards paying for education costs of grandchildren, reducing mortgages or providing the deposit on a house. Generally, most parents are comfortable with this type of financial support so long as it is even-handed across all family members.
Consider super contributions
In some cases, a cash flow surplus is generated by the requirement to draw a minimum pension from a superannuation fund. For those over 60, these pensions are tax exempt. However, it's often difficult to reinvest this surplus back into your superannuation fund, particularly once the investor has retired. In this case, there is no choice but to invest the surplus outside superannuation.
Ultimately, this can lead to an increase in the amount of income tax and capital gains tax payable. An alternative is to use the cash flow surplus to help children maximise tax-deductible super contributions by way of salary sacrifice.
With that in mind, you may want to encourage your child to maximise the amount of salary they sacrifice into their super fund while you make up the “lost salary” in the form of financial assistance. This ensures tax-effective savings for your child, and helps assure you that your financial assistance won’t be squandered. Additionally, this reduces the pressure on children to provide for longer-term savings – freeing them to focus on other financial concerns like repaying a mortgage.
Understand the tax implications
It’s also important to consider how giving financial support will affect you or your child when it comes to tax. While a gift or loan on its own has no tax implications, there could be possible capital gains tax consequences where an asset is sold or transferred to support the financial assistance. In addition, depending on whether the children spend or invest the money received, they will pay income tax and capital gains tax on any investment earnings.
One final point to consider is the importance of keeping clear records of financial support provided to children, particularly where it is not evenly distributed across the family. This will reduce the likelihood of disputes between children, particularly when it comes to handling estates.
Giving your children financial support can help set them up for long-term financial security – but only if it’s used wisely. As such, it’s important to clearly communicate your intentions, and understand theirs, before any money exchanges hands. Depending on the situation, seeking support from a financial advisor could be beneficial in ensuring everyone is clear on the terms of the agreement.
Parents are often tempted to support the least successful of their children and this can lead to resentment and dispute. If this whole process is carefully thought through with the support of your adviser it can be a very effective and uplifting process for all concerned.Considering giving your children financial support? Talk to a financial advisor near you about the best approach for your situation.