The Bank of Mum and Dad: The Right Way To Give Your Kids Their Inheritance - December 2021
December 21, 2021 / Written by Rich Harvey
While rising house prices are causing concern for those who are trying to get into the property market, there is a section of the community who is benefiting from skyrocketing values – homeowners.
Property owners are enjoying rapidly increasing equity levels in their largest asset, and this will add significantly to their personal wealth.
Similarly, for those who invested in the stock market in the past decade, a once-in-a-generation boom is delivering strong wealth gains.
In short – there’s plenty of wealth rolling around for those fortunate enough to have held assets, and that group is dominated by baby boomers and the older cohort of Gen X.
Despite the pop-cultural rise of grey nomads claiming to be SKI retirees (i.e. Spending the Kids Inheritance), in reality most parents are keen to pass on some of their accumulated wealth to their offspring.
A recent report from the Productivity Commission has forecast Gen X and Millennials are expected to inherit more than $3.5 trillion from their wealthy Boomer parents as they pass away. And by 2050, young Australians will inherit $224 billion each year. That’s an extraordinary amount of prosperity moving from one generation to the next.
And while I personally think it’s important to have a succession plan in place for your wealth, I also believe the current state of affairs should have us thinking a little differently about how we share it with our children.
The wealth effect
For homeowners (and share owners) who are seeing their fortune grow, the question becomes how best to help their kids, particularly when it becomes clear that superannuation and financial holdings will be more than enough to live out their days comfortably.
The Productivity Commission’s report into inheritances and gift transfers of wealth found that in 2018-19 the value of the average inheritance was $125,000 and the average gift was $8000.
But interestingly, the report also found that by the time someone receives an inheritance, they’re usually in their mid-50s and this inheritance does little to materially change their circumstances. It simply helps reduce a few debts that are already well on their way to being paid off (the mortgage is the most common).
The Productivity Commission report also found that parents with a wealth-accumulation mindset have likely passed that education and attitude onto their children. So there’s a good chance these children are already using their own resources to build their personal wealth.
Bank of Mum & Dad - doing the most good
I think the key opportunity we now have is the ability to transfer the wealth sooner, so it’s at a time when it would make a substantive difference to the lives of our children.
Gifting an inheritance, or portion of it, before you actually pass away, will deliver the greatest impact for the next generation. Giving the gift that you were planning to give anyway, but only doing it sooner, will deliver more opportunity to have a multiplier effect for your children or grandchildren.
So how can this be achieved?
Handing over the cash
The first move you make could make is to simply gift a lump sum, or even a trust income, to your kids. It looks like a simple, clean way to pass over the wealth, and allows them the flexibility to use the money as they see fit.
That said, I personally don’t think this is a great first option. Gifting somebody a substantial amount of capital comes with risk.
There are tax implications for a start. You would certainly be seeking advice from a qualified accountant before you made this move, but there will inevitably be costs involved that you’d rather not pay.
Also – there are plenty of stories about the curse of lotto winners. People who receive a life-changing sum and then find most of it fritted away in no time. A depressive state of affairs that occurs when there’s been no clear plan on what to do with the dollars when they land.
Obviously not all kids will be frivolous with the money – but some will, and it will be a painful outcome for both them and the parents.
I think there’s a smarter way to pass a portion of the family war chest to the kids without risking spoiling them.
A financial leg up
Rapidly rising property prices means it’s inevitable that younger people are going to need some substantial help from the Bank of Mum and Dad.
And when I say ‘younger’ people I don’t just mean kids in their 20s. I’m seeing clients in their 40s tapping into that financial help from their parents in order to get that investment property or principal place of residence purchase over the line.
In my years of buying and settling on real estate for clients, I’ve seen hundreds of cases where parents have fronted up a few hundred thousand dollars to assist their kids – and I think it’s a great idea.
This delivers their children a fighting chance in a competitive space. They have a boosted ability to buy, and can even increase their purchasing budget, delivering more choice and opportunity.
Best of all, passing on this wealth earlier can result in a more ‘controlled’ distribution. You may still choose to tip in a lump sum toward their mortgage or deposit, or you might offer to provide a chunk of equity as security for a loan. Either way, the ‘gift’ is linked to a mortgage, which means the kids have a structured goal laid out before them i.e. to service the loan and pay down the debt. Gifting toward property is not only generous way to help, it’s also a life-lesson learning opportunity about managing finances.
Some parents are worried that their own property will be adversely impacted - but with the correct advice from a good mortgage broker, parents can provide a limited equity guarantee for their kids deposit – ie the amount they give is limited and there is no risk of having to sell their own property if the child defaults.
Helping the next generation get their foot on the property ladder sooner will give them longer to build up equity in their property, through more time in market too. The compounding effect of your generosity will pay dividends to them for decades to come. Throughout their lifetime and, potentially, the lifetime of their children.
To put it bluntly, why wait to die before giving the kids their inheritance? There’s never been a better time to act. The productivity commission’s report lays out the facts, and our booming real estate market provides the resources. Add these together and you have an opportunity to see your children set up for a lifetime of financial security.
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