Protect yourself while helping your adult children
06 Dec 2013
By Shadforth Financial Group
As parents much of our time, energy and money is directed towards ensuring our children have the best possible start in life, as well as providing them with the means to become productive members of society.
However, as our children grow, become adults and begin their own families, the focus tends to shift to securing our own retirement and to ensuring that we can enjoy our own lifestyle a little more. Even so, the natural desire to 'look after' and assist one's children never fades and when we consider the various financial challenges confronting many Australian families today, it is no surprise that providing financial assistance to adult children is an option being considered by many.
Of course, when it comes to mixing family with money there are often complexities, risks and issues. Not all help is created equal and some approaches work better than others.
For a variety of reasons, simply gifting funds to your children may not be the best approach. Issues such as pride, wastefulness or expectation may arise – and these consequences are unlikely to contribute to optimal family relationships in future years. Likewise, simply lending funds can also cause issues – although in some circumstances, such as the purchase of a home, this can be an attractive option.
So what other options are there? Two of the more interesting and effective approaches are contributing to your children's superannuation savings and assisting them to secure and fund adequate insurance cover.
Assisting with superannuation savings
It is very common for people to leave the funding of their superannuation until after the mortgage has been repaid and the kids (your grandchildren) are educated and in the early stages of becoming self-sufficient.
The problem with this approach is that the government has placed annual contribution caps on superannuation. These caps limit contributions in later years, when people are generally more able to direct surplus income to savings, which can leave those who haven't planned ahead with a significantly reduced after-tax income in retirement. Whilst there is some policy merit in this approach, it does make planning ahead that much more important. Unfortunately, planning ahead tends to be lower down the priority list for people in their peak spending years where the focus is, understandably, on repaying debt and funding children's education.
However, no restrictions apply to who can contribute to super, so one very effective way of helping your children is to fund additional superannuation contributions on their behalf. This allows them to focus on their current needs safe in the knowledge that their longer-term financial planning is under control. You also can rest easy knowing that your funds are working hard for their future and that there is no risk the money can be 'wasted' in the short-term, as money in super is generally not accessible until retirement.
It is important to remember that annual restrictions still apply – and it is vital that you work with your children to ensure you operate within those restrictions. As with all superannuation contribution strategies, we recommend working with your adviser to ensure all the relevant rules and regulations are complied with.
Ensuring and funding adequate insurance
In much the same way that superannuation can be neglected during the peak spending years, so can risk management and insurance. People with young families are often very focussed on their short-term cash flow. Interest payments, education costs and the desire to travel – particularly with the Australian dollar at near record highs – all conspire to make insurance premiums feel like an unnecessary burden.
However, as those of us with a little more experience realise, ignoring a risk or simply pretending it isn't there, does not change the fact that the risk exists. Unfortunately the reality is that thousands of people every year are confronted with unpleasant, unwelcome and unexpected medical news. Of course, many are involved in accidents, often completely outside of their control, and in such circumstances the last thing a family needs is significant financial stress.
Frequently in circumstances such as these, it is the parents who end up stepping in and providing financial support, in addition to the emotional and physical support already on offer. This means that unless you have accumulated significant wealth, your children's risks are in a very real sense your risks also. On the positive side, you can help your children to protect themselves, and at the same time safeguard your own financial future, by paying for insurance premiums on their behalf.
As with the superannuation strategy, it's important to work closely with your children to ensure that any existing insurance cover is taken into consideration and that you take appropriate advice to ensure that the most applicable policies for your children's circumstances are arranged.
If you're considering these, or any other option, for providing financial assistance to your children, we would be pleased to discuss the various options available with you and to tailor an appropriate and effective approach which provides financial security for you as well as for your children.