5 traps to avoid when giving an early inheritance
Written and accurate as at: Nov 13, 2023 Current Stats & Facts
Australians are living longer than they used to, and many inheritances are arriving in children’s hands too late to help buy a home or start a family. For some parents, gifting all or part of an inheritance while still alive can be preferable, but there are a few important questions to consider.
Are you neglecting your retirement needs?
If you’re in a position to help your children out financially, doing so now rather than waiting until you pass away could help kickstart important new chapters in their lives, and you might take great pleasure in seeing your money put to good use.
But it’s important not to put your desire to help your children ahead of your own needs. Before you part with any money, crunch the numbers to make sure you’ll have enough left over to last you through retirement. Not planning ahead appropriately could leave you financially dependent on your children later on in life.
Are you confident no family dramas will result?
Ideally, an early inheritance will be met with gratitude and no complications will result — but it’s not always so simple. Depending on the details of the arrangement and your family’s dynamic, things could get ugly. For example, if you have multiple children and intend to give each an equal share, will any feelings of resentment crop up if one is already wealthier than the others?
And if just one is getting their inheritance early (say, to help pay for a home deposit), will the others have a chance to receive theirs early too? If not and you plan to give them their share when you pass away, is the child who received their inheritance early entitled to anything else?
Unfair treatment, whether it’s actual or perceived, can give way to legal disputes down the track. Take some time to discuss any potential issues with your children, and if you suspect things might get contentious, think about seeking advice from a qualified legal professional.
What happens if your child’s relationship ends?
You should also consider what might become of your gift if your child’s marriage breaks down. Unless a binding financial agreement is signed ahead of time, you might find that the money you gifted — or the assets purchased with that money — will have to be divided between the two parties.
One potential solution could be to loan your child the money instead, accompanied by a loan agreement between you and your child. If they’re married or in a de facto relationship, this might be able to ensure the sum doesn’t form part of the pool of assets to be divided if they split up with their partner.
An appropriately written loan agreement could spell out things like the amount owed and the conditions of repayment (for example, how often repayments will be made and whether interest will be charged). You could also then specify in your Will whether you want the loan to be forgiven at the time of your death or treated as an asset in your estate.
What are the implications if you receive Centrelink payments?
If you’re a pensioner, there are limits on how much you can give away without it affecting your Age Pension payment. Currently, the gifting free areas (which apply to both singles and couples) are $10,000 in one financial year and $30,000 over five financial years.1
To make sure you’re getting paid the correct amount, you’ll need to inform Centrelink of any gifts made as part of your regular income reporting duties.
This applies to more than just cash gifts. For example, paying off your child’s loan, transferring money into a trust, and buying a car as a present for your child might count as gifts in Centrelink’s eyes, in which case they will be assessed under the income and assets tests.2
There are some exceptions to this rule, so it might be a good idea to contact Centrelink ahead of time to discuss how any gifts might affect how much Age Pension you receive.
Are you certain you’re not being pressured?
Finally, it might be worth asking yourself if you’re feeling pressured at all to give your children their inheritance early. Are they being pushy, or do you get the sense that an ongoing relationship with them is conditional on them getting their way?
Your child might believe this sense of entitlement is justified — especially if they’re due to inherit the money anyway. But already problematic behaviour like nagging can potentially turn into meddling in your financial affairs and even outright elder abuse.
At the end of the day, the money is yours and you should be entitled to do with it what you want. While giving your children an advance on their inheritance can make all the difference in their lives, consider if it’s worth it if it means a substandard retirement or a breakdown of family ties.
Sources
1 https://www.servicesaustralia.gov.au/how-much-you-can-gift?context=22526
2 https://www.servicesaustralia.gov.au/what-gifts-we-include-income-and-assets-tests?context=51411