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Here's the right way to help out your kids

Brian Hor  |  22 Dec 2016Text size  Decrease  Increase  |  

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When it comes to estate planning the best option is to only provide monies to children by way of a loan, according to Brian Hor at SUPERCentral.


We all know that life's pretty expensive living in Australia these days--especially if you have a hankering for buying residential real estate in a capital city.

Plus, if you are "lucky" enough to get into the real estate market, that usually means that you've signed yourself up for an enormous mortgage for the rest of your natural life.

Then there's the expenses of raising a family, not the least of which is private school fees, which annually compete with the mortgage for the title of the major financial commitment of the year.

Now, baby boomers have long been derided for "hogging" the real estate markets and preventing the next generation from getting a chance to claim their own little bit of dirt.

Anyhow, whether it's out of parental love, or just sheer guilt, baby boomer (and other generation) parents are often keen to give their children a financial helping hand in life.

This "monetary love" is often in the form of providing a hefty deposit for a home, helping with regular mortgage payments in hard times once the home has been acquired, or helping out with private school fees (especially if one parent takes time off work to focus on child-raising, reducing the obligatory dual income family to a single income prospect).

Should they give the money to their child or children by way of a gift or a loan?

Hmmm. Certainly, giving money as a gift is easiest and "cleanest," and from the parent's point of view it's certainly a more magnanimous gesture that they can make to their child than granting them a loan (which has "strings attached" and seems a bit uncaring, since their child will no doubt be thinking, "Hey, I'm your own flesh and blood, why can't you just give it to me Mum/Dad?")

Plus, they're going to get it anyway after you die, aren't they?

Stop and consider these issues first:

1) According to the Australian Bureau of Statistics (ABS), there were 121,197 marriages registered and 46,498 divorces granted in Australia in 2014.

If we assume (rightly or wrongly, but probably more rightly) that this proportion is reasonably stable over a number of years, this translates to saying that around 38 per cent of marriages in Australia end in divorce.

That's a better than 1-in-3 chance that, if you give money to your child as a gift and they are married, their marriage may fail and that money forms part of the "matrimonial property" that the couple will fight over in the divorce proceedings.

2) What if the child runs a business? Again, the ABS says more than 60 per cent of small businesses cease operating within the first three years of starting.

So, there's a much better than even chance that your generous gift to your business entrepreneur child will end up in the hands of his or her creditors within three years.

3) Let's not forget that once the money is given, it's gone. If a parent has been just a bit too generous, they may have not left enough for themselves for a comfortable (or even adequate) retirement. Remember what happened to King Lear.

No, the much better option is to only provide monies to the children by way of loan (and especially if the loan is significant, under arm's length documentation signed by all parties--including children's spouses--and secured by way of registered mortgage over real estate) for a host of reasons.

Where the parent is in the position of a secured creditor, then in the event their child becomes the subject of a divorce or relationship breakdown, or succumbs to business failure and bankruptcy, the amount of the loan (plus any agreed interest) has to be repaid to the parent first before the child's outgoing ex-spouse or their unsecured business creditors get a look in.

The fact the money is given to the child by way of a loan (and particularly if as a secured loan) means the child hopefully would be encouraged to treat their parent with respect, including assisting with their care when they are old and frail.

If it later transpires the parent falls upon hard times but the child is doing okay, then the parent can ask for the loan or part of it to be repaid.

Finally, if the parent feels they really don't intend to ever ask for the money back, they can simply forgive the loan on their death via their will (or even better, set up a testamentary discretionary trust for the child under their will and give the ownership of the loan to that child's trust as part of their inheritance in order to continue the protection of the loan amount for the benefit of the child and their own family).

Shakespeare may well have said "neither borrower nor lender be," but he wasn't a very good estate planner.


Brian Hor is special counsel, superannuation and estate planning, at SUPERCentral, an SMSF services provider to accountants, financial advisers and SMSF administrators.

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