Parents, Adult Children, & Money

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Parents, Adult Children, & Money

Nearly every client I work with who has children give some thought to how they might help them out in adulthood. For those with young or teenage children, the thoughts are often around assisting them into the property market via a lump sum gift to bolster their potential deposit.

For clients whose children are beyond this milestone, considerations around early inheritances commonly crop up. Where parents perhaps in their 70s or beyond can see that they comfortably have their retirement needs met, they are often thinking about distributing some of their wealth amongst their family today rather than leaving it all for when they’re gone.

But dealing with this intergenerational wealth transfer comes with some potential problems for both the giver and the recipient. In this episode I’m going to share with you a few of those challenges that I’ve seen. Perhaps these examples will help you in navigating this potentially tricky area.

 

Australia is very unusual in having no form of estate or inheritance taxes. That means that there are no restrictions on parents gifting money to their children. The only exception is around Centrelink age pension entitlements, where gifts made exceeding $10,000 will not be recognised for a period of five years. Doesn’t stop you making the gift, it just means that your pension won’t go up as a result of you having less assets.

The First Home

As I mentioned in the intro, the most common form of intergenerational money transfer that I see is parents helping their children get into the property market. We all know that property prices have risen significantly over the past decade or so, fuelled by record low interest rates. Particularly in Sydney and Melbourne, saving a 10% or ideally 20% deposit in a market where an entry level property might be $800,000 to $1,000,000 can be extremely difficult for a person in their 20s, perhaps paying off a HECS debt at the same time.

I’ve spoken in the past few episodes about the fact that the Australian tax system very much favours home ownership, and certainly as a foundation for long-term financial security, owning the roof over your head would have to be top of the list. Assuming the parents can afford to make this type of gift, it unquestionably makes a lot of sense, enabling their child to start building equity in their home whilst perhaps also providing the mental health benefits of security in where you live. The stress that can arise from being a tenant, with the potential to be asked to leave your home on the whim of a landlord, is significant and real, something I hear frequently from the younger clients that we work with.

Most commonly I see this assistance made via a straightforward gift of funds. I am aware of some advocating structuring this gift as a loan, as a form of protection in the event the child has a partner or spouse and that relationship breaks down in the future. Whilst this is a legitimate concern, I can only tell you that in practise I can’t recall ever seeing it done this way. Most people prefer to keep things simple and often in a couple situation each member of the couple’s parents chip in anyway.

So my take with this one is that if you have the financial capacity to help your children get into the property market, go for it. This will be an enormous help to them, delivering significant long-term financial security, and your financial gift when your children are in the early stages of adulthood will have a massively larger impact than you leaving them money perhaps 40 or 50 years later when you eventually pass on.

Early Inheritances

Let’s now switch to other type of financial help that parents might provide to their adult children. These might be deliberately framed as early inheritances, typically lump sums. Or it could be drip fed on a needs basis.

As with helping your children into the property market, such gifts can be extremely helpful in them building financial security and resiliency. But there is certainly potential for downside, something I’ve seen happen with several different clients. Sometimes well meaning parents, in propping their children up financially, rob them of the need to become independent and fend for themselves. I was speaking to a client just yesterday whose daughter and her husband regularly put their hand out for help, whether it’s new laptops for the kids, braces for their teeth, or a bigger car. The underlying need for this help stems from the fact that the husband’s business is unsuccessful and would appear to be unviable. My client reflected on the fact that his son in law would be better off giving away the business and simply going out and getting a job. I observed that were it not for the financial handouts, that would be what he had to do, but given the financial assistance provided, this husband is able to continue beating his head against the wall, making no money, and bumbling along.

There was another instance where clients owned a very successful business. They employed their daughter within that business and whilst she made a valuable contribution, it didn’t align with the pay packet and company Mercedes that the parents gave her. When the parents were ready to retire they sold the business. Almost immediately the new owner sacked their daughter, realising that the remuneration package she was on was completely uncommercial. However she had built her life and her status around this level of income. She wasn’t able to find another job at anywhere near the same pay and she had several challenging years starting businesses and trying different things in an effort to move forward. Her parents, well-meaning and loving though they were, actually set her up for a poor long-term outcome.

It’s an incredibly difficult thing as a parent if you can see your child struggling, have the ability to help, and yet need to resist doing so. We all know that an important part of developing in life is sometimes failing and falling on your face. But it’s a natural parental instinct to want to try and save your children from such falls and harm, even when they are grown adults.

Sometimes parental gifts are granted with strings attached. One that I saw provided a lump sum with the stipulation that their daughter needed to put it in her superannuation account. As there daughter’s financial planner, this raised an interesting discussion. The clients had children at private secondary school with the related expense that flows from that decision. They also still had a mortgage. The husband had no intention of retiring early, the wife similar. Having sufficient retirement income wasn’t really a significant problem for them. But cash flow was tight right now. Whilst mathematically, placing those funds into superannuation is likely to provide the best long-term wealth outcome, what may have been far more helpful for this couple would have been to simply pay it off their mortgage and reduce their home loan repayments. The daughter however felt that her parents’ instructions were quite clear and so we needed to abide by that. I thought this was an interesting example of parents not being prepared to let go. Not trusting in their daughter and son-in-law to make wise financial decisions. It seemed particularly odd to me as these were a very sensible couple with no history of obviously frivolous spending.

I think examples like this hint at a potential unintended darker side of parental gifts to adult children. Sometimes these gifts are used by parents as a way to remain relevant or have control over their adult children, when they should be stepping away and letting their children fight their own battles.

Conclusions

Where it is clear you have more wealth than you will need to live out a comfortable life, helping adult children get themselves established is usually an excellent idea. But as I hope I’ve managed to illustrate in some of the real-life examples that I’ve seen, there is the potential for downside and the gift givers in particular need to be conscious of not undermining their adult children’s growth and development. When we work hard to achieve something, we value it that much more than when it falls in our lap. Think about how any financial support you give to your adult children can be done in a way that doesn’t undermine this important element of human nature.

 

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Related post: What to do upon receiving an inheritance

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