Five Tips for Giving Money to Family
Many think giving money to their children or family are advantages – It’s not. In fact, they are a massive burden that can lead to anger and regret.
This is because over the next 20 years some AU$3.4 trillion will get passed down from one generation to another. The young keep telling me that life is hard and that they have no chance of buying a house.
That, in many cases is crap. But at the same time there may be some truth in it.
To those that tell me they will not buy a home I usually tell them that they won’t have to. Most will be given the family home and yes in many cases the family home will have to be shared with other siblings, but I would give my left and my right arm to be in their position when I was their age. But it is not ideal – our children want to have a home now.
Now that may mean the young have to wait until the reaper has come and taken their parents away but inheriting a debt free home in your 40’s or 50’s is not a bad thing. Most people today aged 40 to 50 would love a debt free home. I was speaking to a doctor aged 71 the other day and he still has a debt on his home of $710K.
But there is no doubt – whatever we do not use (or give away while we are alive) we will leave it behind for others in our family to enjoy. And my experience is that this wonderful, beautiful gesture may become the pathway to hell.
And that is because if it is not done correctly the chances are your hard-earned cash and investments are going to get blown away.
Over the last 18 months or so I have been having a lot of discussions about how money should be passed about. I have been involved in many estate plans, and many do not realise how big their estate will be. Recently I had clients who thought they were worth less than $600,000 and thought an estate plan was not necessary for their ‘meagre’ wealth. By the time I finished with calculations which included life insurance and super we were sitting with an estate value of more than $4m.
Here is what I do know. If you have worked hard for your dough you are going to be pretty pissed off if it is not used wisely. These are hours spent running a business or working overtime to pay your mortgage. You did not buy the Ferrari or do the 30-day cruise, but I can bet your bottom dollar your kids probably will because they can afford it. With your money. And when you find out you are going to be properly cross about that.
Here I what you should do if you want to give your money away.
It’s about you, not them
Parents usually will do anything to help their kids out. Often at the expense of damaging themselves because if you overdo it (give more than you should) and need it back all kinds of excuses come out, and you never get to see your own dough. And I do not care how you try to convince me that your kids are good and decent. When it comes to money there are no guarantees because even if your kids are the best in the world if they divorce, go bankrupt or worse die, it will be almost impossible to get it back. Trust me this is depressing and sad stuff.
And so many of my earlier discussions are about how much you need to keep for yourself if you want to give money during your lifetime.
In other words, worry about yourself not your kids. Kids feel they have an automatic right to your money. They don’t. It’s your money. The only person who has a right to it is you.
Once you make a gift, there is no guarantee of getting it back if you need it. You might trust your children to look after you, but their death, divorce or bankruptcy would take the funds that you gave them out of their hands. All rather gloomy stuff.
Have the Discussion
Whether it’s a discussion about your Estate plan (Wills) of gifts/ loan during your lifetime have the discussion. Talk to your family, especially your kids.
The last thing they need are surprises. If you want to give more or less to one child/ family member, explain to them the reasons. They may not be happy about it but at least they expect it and they can ask questions whilst you are still alive.
My experience is that when they find out they have received less and it is unexpected, they try looking for answers and usually none are available because you are no longer around to explain. This then creates anger and everyone ends up in court hating each other. Which leads me to ……..
…..Try to be Equal
I have found that if you do treat children unequally it causes the largest and most bitter disputes between them.
Many think that means all kids get the same. It does not. What it means is that the distribution is seen as being correct or fair.
I was recently involved in an estate plan when one child living overseas was not to receive a significant cash payment which her 3 other siblings would receive. This was based on advice I had given because the child living overseas had received significant financial help whilst my client was alive whereas the other 3 children had not.
This was clearly put in the will, and the 4 children were all told about it. All 4 agreed that it was fair. In this case the chances of dispute significantly fall but without the explanation or discussion? Who knows where it would have ended up.
Loan or gift?
If you provide funds to your children during your lifetime, is it a loan or a gift? I personally always favour loans because a loan is repayable. A gift never is. But it can cause issues in themselves.
A loan means that in the event of divorce, death and sometimes bankruptcy of your child these funds can be repaid to you should you wish.
The problem? It needs to be documented and for reasons that evade me, parents don’t like getting their children to sign things. Emotion take president over logic.
But if you do go down the emotion route, don’t complain when you lose it.
If you do decide a loan is the way to go it could be interest free and repayable on demand, but I would always include a small repayment – it could be as low as $100 a year and make sure it is received/ paid.
Why? Well because a loan repayable on demand lapses after 6 years if no demand or repayment is made which converts it to …… a gift. And if there is a repayment no-one can argue it was not a loan.
This can be particularly useful if you have a married child and you have provided financial assistance to them to say pay a deposit on a home. If they later divorce and you have no documentation the chances, are you will have give approximately 50% to your child’s ex, and I have never met an ex in law that is happy with that.
Problems? Well banks don’t like parents giving loans for a deposit on a home – they want it as a gift. And if you yourself get into financial difficulty then suddenly creditors could ask for the money back from your child. It’s not ideal.
Never Rush into Giving Gifts/ Loans or an Estate Plan
Why?
Because the biggest screwups I have come across is because there was a rush to do something.
Time allows you to think about what is right. If you have a family discretionary trust or a company this complicates matters. Add in superannuation, life cover etc and suddenly there a lot to think about. And then there are tax bills. Whatever you do the last thing you want is to allow the ATO to get their grubby hands on your money.
Many of my clients have multiple trusts and multiple companies. The more complex your structures and investment vehicles the more time you need to think.
Use Trusts
My preference when undertaking estate plans is to put the estate in trust at death. This can provide protection from divorce, bankruptcy and ensures maximum tax advantages. If drafted properly it can also ensure your bloodline benefits from the capital.
The latest budget has put a spanner in the works (because the Australian Government thinks that if you think about passing your wealth to your kids you are evil) but trusts are still a great way to protect your assets. Your aim is to protect your wealth, not necessarily to save taxes.
It will also stop a 19-year-old kid from buying a Ferrari or the 30-day cruise and ensure the capital is protected and invested for your child’s future. They can buy the Farrari when they are more responsible.
If you want to give a gift during your lifetime with the expectation that they invest it rather than buy a Ferrari, then family trusts are a good way to control funds but new tax rules have put a spanner in the works so take advice.
When it comes to giving your money away remember a few things. Its is your money and only you have the right to it and decide who gets what. And whenever you do give it away make sure it is protected and cannot be abused. But unless you talk about it and plan it that won’t happen.
