Getting their home deposit over the line

Saving up a 20% deposit is one of the biggest barriers to home ownership, and the continual climb of property prices can push it even further out of reach for younger Australians. Here’s where a bit of parental charity can make a major difference.

If you can assist with your child’s deposit, it can be just what they need to escape the rental market and jump onto the property market instead. You don’t have to give the full amount – even a partial contribution can help reduce their loan-to-value ratio and save them from having to pay Lenders Mortgage Insurance.

From here, a whole host of possibilities are unlocked. Owning a home could help with goals like starting a family or funding their retirement down the track. And as your child builds up equity, they might even be able to leverage it to start a property portfolio.

Getting ahead on their mortgage

If your child already has a mortgage, a modest financial gift can be deposited in their offset account or go directly towards paying down the principal. Either way, any extra repayments will help reduce the balance on which interest is charged.

And if your child can keep up the momentum and pay more than the minimum required each month, they might see their interest payments steadily deflate over time. This can ultimately save them thousands of dollars and shorten the life of their loan by years.

Paying off higher education fees

While HECS-HELP debt might be more tolerable than other types of debt, given that your child’s income determines when and how much they pay, it’s still not particularly pleasant. And with indexation tied to inflation, it can linger in the background for much longer than your child is comfortable with.

If you’re able to help whittle it down, you can free up your child’s cash flow and make it a little bit easier to navigate the rising cost of living.

It might also lower some of the hurdles to buying property if that’s in the cards, as lenders tend to include HECS-HELP debt in their serviceability tests (though recent changes give them leeway to disregard it if it will be paid off soon).

Help them start investing

It might not be as immediately helpful as some of the other options on this list, but investing is one of the most effective ways to beat inflation and grow your savings over time. If your child hasn’t tried their hand at it just yet, offering a small sum to get them started can give them the motivation they need to turn it into a lifelong habit.

Don’t neglect your own needs

Giving your kids smaller gifts sooner can give them a meaningful headstart in life, and there’s a joy in being around to see them put that money to good use. But you’ll also need to be mindful of the potential impact on your own lifestyle.

Will you have enough savings left over to secure the retirement you want? Are you still confident in your ability to manage surprise expenses? Will your Age Pension be affected? These are all things you’ll have to discuss as a family before you make any decisions. And if you’re looking for personalised advice, consider reaching out to a qualified financial adviser.

If you’ve given your child an early inheritance or a large sum to help buy a property, you might be wondering what would become of it if they were to split up with their partner. Could any of the money (or the assets purchased with it) go to an estranged spouse?

Even if you’re on great terms with your son or daughter in-law and believe your child’s relationship with them is built to last, it’s only natural to worry. Fortunately, there are legal steps you can take to help prevent the money you gifted your child from being eaten up by a divorce settlement.

Have your child and their spouse enter a financial agreement

One solution might be encouraging your child to enter a financial agreement with their partner. Often called a ‘prenup,’ this is a written document that lays out how certain assets will be divided in the event of a divorce.

If drawn up correctly (and with the help of a family lawyer), a financial agreement might be able to block any claims to assets by ex-partners and keep your child from getting embroiled in a drawn out and stressful dispute before the court. It can be entered at any time before, during or at the end of a marriage or de facto relationship.

Broaching the subject with your child might be stressful, and you could inadvertently put the idea in their head that you don’t trust their partner. But it’s important to remind them that no one knows what the future holds, and a financial agreement is just a tool to make sure your family is protected.

Loan the money to your child instead of gifting it

Another option is to consider loaning your children the money instead of gifting it. Unlike a gift that’s given with no strings attached, a loan is unlikely to enter the pool of divisible assets in the event of a relationship breakdown (and it will also be largely safe from claims by creditors).

If you do go down this route, you’ll need a solicitor to draw up a Deed of Loan, which will outline details like amount, term, purpose, and whether or not any interest will be charged. Many parents choose to forgive the loan at a later date, either while they are alive or in their Will.

Think about establishing a testamentary trust

Finally, if you haven’t given your child their inheritance yet but want some form of assurance that it will stay in your family’s hands after you’re gone, it might be worth looking into a testamentary trust. This is a legal structure that gives your assets to a trustee to hold upon your death. It will then be up to them to distribute the assets to your beneficiaries according to your wishes.

While a testamentary trust might not be an ironclad defence against divorce given the Family Court’s far-reaching powers, it can play a major role in quarantining your child’s inheritance from any claims by their partner.

Remarrying? These strategies might help 

You might want to consider one of the above strategies yourself if you’ve remarried and want to ensure a potential divorce doesn’t cost your children their inheritance.

Divorce, whether it’s yours or your child’s, can throw the plans you have for your family’s future in disarray. If you’re thinking of implementing any of the above options, make sure all parties involved seek out legal and financial advice.

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