There is an increasing trend for Grandparents to factor in grandchildren when deciding how they want to allocate their money in their later years. For some, it may be via business succession planning, leaving a legacy for the family or simply contributing to important financial events (tertiary education, house, car etc). Passing on wealth can be one of the greatest gifts you can give your family.
With increasing child care costs and housing affordability issues, it is becoming common for Grandparents to look after the children while their parents are at work. This means Grandparents are having a greater involvement in the day-to-day lives of their grandchildren and often electing to pass on some wealth.
However, there are some traps for the unprepared and it’s important to consider the various options and risks to allow for an effective transfer of intergenerational wealth.
Asking the right questions
Typically, strategies around wealth transfer fall into the category of having “the right money in the right hands at the right time”. However, it is not always that simple. It’s important to discuss wealth transfer in detail. Ask plenty of questions, understand what your objectives are and seek professional advice.
As an example, if you want to help your grandchildren with their first home; here are a few questions to consider above and beyond the usual cash flow, assets and liabilities:
- Do you want to help pay for the deposit and/or repayments?
- Do you want to invest this money in them now, at retirement or leave it in your legacy?
- How much money will be available for the grandchildren after you have provided for your own retirement?
- What is the income of their parents?
- Are your grandchildren financially dependent on you?
The above considerations are very important and will help determine the appropriate strategy structure you undertake (i.e. family discretionary trusts, testamentary trusts, or gifting).
6 key issues to consider when helping out grandchildren
- Age and income of the grandchildren – Remember investment income for minors is taxed at penalty rates (up to an effective rate of 45%). Whereas, for over 18s, investment income up to their respective marginal tax rate may be tax free. This can be particularly important when developing strategies to help pay education costs.
- Centrelink benefits – It’s important to remember that if you receive a pension or part-pension from Centrelink you are only able to gift up to $30,000 every five years at a maximum of $10,000 per year without adversely affecting your entitlements.
- The right team of experts – Selecting an appropriate Financial Adviser can make life easier as they will often access a team of other specialist experts such as Accountants and Estate Planning Lawyers – thus ensuring your advice is comprehensive and consistent across all areas.
- Relationship risks – Consider the risks associated with relationship breakdowns in the family such as sibling rivalry on the death of a parent or divorce of family. This may mean a well intended gift for a grandchild ends up being fought over in divorce courts. Consider if testamentary trusts or drip feeding financial assistance may be more appropriate than gifting lump sums.
- “Pay yourself first” – Be very clear on your retirement funding needs and look after yourself before committing to help your grandchildren. It’s a rewarding act to help out your family financially as long as you ensure you are not forgetting about yourself.
- Manage family risk – Families are often called on for help in the event of illness and injury of a child or grandchild. Discuss the option of funding grandchildren’s income protection or trauma insurance premiums; that way you create peace of mind and minimise financial stress if the unfortunate occurs.
For further advice on the most tax effective strategies to transfer wealth, make an appointment with us today.