Money
Accelerate your legacy: how to release intergenerational wealth sooner
You don't have to wait until the will is read to leave a legacy for your children. Sharing part of your nest-egg will help your kids grow their own wealth sooner (plus you get the added joy of seeing your support enrich their lives).
By Nicole Pedersen-McKinnon
One of your dearest desires may be to leave a legacy for your children… to not just live a good and full life yourself, but to help your kids do the same.
But that word “dear” may be the operative one.
And while giving money to your next generation used to be an end-of-life, in-the-inheritance thing, for many people, it’s become an earlier priority.
Parents are watching adult children unable to catch insane property prices with a house deposit. They’re also watching them battle rents that are impeding that deposit. And, if they have a mortgage, they’re watching them struggle with the repayments.
As a result, it’s estimated the so-called Bank of Mum and Dad now lends an amount that places it between the 5th and 10th-largest ‘bank’ in the country – between $35 billion and $92 billion annually.
The average help given for a house deposit, says new research from Mozo, is now $74,000. This is the highest amount ever recorded.
One-in-3 first homebuyers received parental assistance, says Mozo’s Bank of Mum and Dad Report, with more than 1-in-4 of those parents concerned about the impact on their own financial future.
Helping out pre-retirement
Before you gain access to your super and without dipping into your home equity, being able to financially help out your kids will be dependent upon having ready cash or assets you can turn into ready cash, say shares outside of super.
The good news at that stage is there is no personal repercussions from doing so – giving money won’t affect your tax (besides obviously a sale potentially triggering capital gains tax)… it won’t affect your super… it won’t affect your pension.
The only implication for you is really opportunity cost – what else could you be doing with that money/those shares? And maybe whether you believe your child or children will deploy it in a more beneficial way.
What about tapping in – early – to the latent legacy that is tied up in the family home?
Well, you might be able to redraw what you have overpaid on your mortgage (hopefully this is instead more safely sitting in an offset account).
More on this: Pay off your mortgage in the next 7 years
You might even be able to extend the mortgage. If you’re far enough from retirement, a lender could agree to refinance your loan to unlock equity – Mozo’s Bank of Mum and Dad Report revealed 11% of parents did this.
But besides having enough money to live on in retirement, your other main financial goal should be to have a fully-paid-off property to live in… and you might be getting a little too close for (retirement) comfort.
So let’s look at your other options to help out your younger ones, both before and after you’ve retired.
Going guarantor for your kids
A common approach that means no money changes hands – which comes with some advantages I will explain in a moment – is going guarantor for a family-member’s property purchase.
What you do is use the equity in your home to ‘top up’ their house deposit. So, if they’ve saved a 5% house deposit, you increase it to 20% so your child doesn’t have to pay hugely expensive lenders’ mortgage insurance.
But note that they DO still pay the minimum monthly amount required on (in this case) a 95% loan.
And here’s another enormous downside: if they stop paying it for some reason, like they can no longer afford it, you are liable for whatever portion of the equity you put up.
Worst case scenario, your own home could be sold to recoup the 15% for which you are responsible as guarantor.
As you approach (or are in) retirement, opening yourself up to this danger – the only control over which is in someone else’s hands – is a cause for serious pause.
Read this too: Helping your kids buy their first home?
On the flipside, many lenders will agree to release you as a guarantor once the borrower has built enough equity or refinanced.
But bear in mind, too, that the federal government’s First Home Guarantee scheme lets people take out a loan with just a 5% deposit anyway. This will soon be available to all first home buyers, no matter their income, up to the average property price.
The government itself guarantees the 15% to avoid lenders’ mortgage insurance.
So, what about some – possibly safer – options to help out your younger ones once you’ve retired?
Gifting some super
Fourteen percent of parents either delayed their retirement or – once retired – accessed their super to give to their kids, according to Mozo’s report.
The lack of restrictions on what you can immediately take out of super in Australia means, happily, this decision is yours… but the consequences, possibly unhappily, will be yours as well.
Naturally, anything you withdraw decreases your spending ability, and also the amount that is available to commute to a tax-effective pension.
But there is also an important consideration if you are trying to qualify for any age pension: the deprived assets rule.
Gifts of cash or assets under $10,000 a year and $30,000 over a 5 financial year rolling period do not affect your eligibility.
However, give over this amount and the so-called deprived assets get included in the assets test and ‘deemed’ in the income test for 5 years from the date of the gift.
That also means that gifting 5 years before a social security benefit might be payable could rule it out.
Obviously, the rules are to prevent people ‘depriving’ themselves of substantial levels of assets or income in order to maximise their social security payment but, if you might be eligible, they are also a big consideration in gifting to help your children.
(This is where going guarantor has an advantage: no money changes hands. And just note here that it’s considered a ‘gift’ if you purchase a property with family and receive a lower legal interest in it compared with the amount paid.)
If the age pension is not accessible to you, because you have too much in super, then the only ‘deprivation’ that will be relevant will be whether you will need the money.
Not-so-super inheritance
But there is another angle to using super for your adult children too: it is far smarter to do this before you die rather than as an inheritance.
The system is not designed for you to die with super and its architects certainly didn’t want you to use it as a tax-vehicle for inter-generational wealth transfer.
So there is effectively an inheritance tax in Australia if you leave even a cent to any child over 18 - any heirs need to also be dependents, or you/they will forgo a chunk of it in tax between 17 and 32%, including the 2% Medicare levy (on before-tax or concessional contributions).
Yes, you could kiss goodbye to up to a third of your legacy.
So there is an argument for giving your children any super money when you are alive or at least cashing it out before you die, so that it falls into the rest of your – tax-free – estate.
(And don’t forget to make a binding death benefit nomination every 3 years with your super fund to make sure your super goes where you want it to.)
Using your own home to help fund the kids’
I refer you to what I said earlier about your dual retirement goal being enough money to live on and an unencumbered property to live in. That matters because if you’re like most Australians, a significant chunk of your wealth is likely ‘locked up’ as equity in your property.
There are options to unlock your equity.
You could downsize. However, that’s perhaps not a move you want to make now… or even ever.
An alternative, once you reach at least 60 years of age (it doesn’t matter if you’ve retired yet), is to take out a reverse mortgage.
Here, a lender gives you a loan with no required repayments and you instead agree to repay it, with interest, on an unspecified date in the future.
Now, because the date is unspecified, the interest rate will be higher – perhaps as much as 200 basis points above a regular mortgage.
What’s more, the unpaid interest will roll up year after year, and so the debt will grow significantly.
If property price growth matches the reverse mortgage debt, this is probably not a big deal.
But should prices flatline or dip, it is entirely possible that the debt will grow to consume the entire value of the property (but note, it cannot grow beyond it and you cannot be forced to sell your home to repay it).
A reverse mortgage usually becomes an option if you have a large amount of equity and have hit age 60.
In essence, taking one out to give money to your children might be a good way to pass them an inheritance sooner rather than later. Which may actually mean more to them, depending on where they are in life.
Keeping your family’s money safe
I earlier used that word “lends” with respect to the Bank of Mum and Dad, deliberately.
Firstly, the difficulty is that – when used for a property purchase – mortgage lenders are increasingly wanting parents to provide a “gift letter”, specifying it is not a loan.
The reason is that a loan would reduce the amount the adult child could borrow from their lender – technically, the repayment on that loan would then need to be factored into the loan assessment and make approval more unlikely.
Parents may feel obligated to provide “gift letters” even when they and their adult children regard the transfer as a loan.
But secondly, there is a potential problem with such a letter or designation, in that if your child is purchasing with a partner and the relationship sours it could end up defeating the purpose of an ‘intergenerational wealth transfer’.
While a lender might require a ‘gift’, a lawyer would often recommend a loan because in a separation settlement, a loan could come out of the asset pool rather than go into it and potentially be split.
It’s rare for a ‘gift’ to one of the parties, even from the Bank of Mum and Dad, to be excluded from the asset pool.
And it may be treated as being meant equally for both parties. There is precedent in the Family Court.
The way you stop this and keep the money in the family is an officially documented loan, the features of which make it clear:
- that the money is a loan that must at some point be repaid.
- the terms and time of that repayment (even if there are no required periodic repayments).
- that the recipient has the capacity to, over time, repay it – so sufficient money or assets.
It is imperative to take legal advice if you are considering this type of intergenerational wealth transfer.
The bottom line for the family’s bottom line
Trillions of dollars is set to change hands from the older to younger generations over the coming decades.
And many parents want to pass on money earlier to help when their children need it most: at home-buying time.
But bear in mind that, to further complicate matters, gifted savings may not be classed by lenders as “genuine savings”. They might still refuse your children’s loan application unless they also see a pattern of ‘reserving’ as evidence they’ll be fine ‘repaying’.
So they will need to get saving regardless.
And from your point of view, in what way you give a ‘living inheritance’ requires careful consideration, not just how much you give.
Feature image: iStock/skynesher
This article reflects the opinions and experiences of the author and does not necessarily reflect the views of Citro. It contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account, and they should always seek their own professional financial and taxation advice that takes into account their individual financial circumstances, objectives and needs.
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