Early inheritance a golden ticket that can backfire

The high cost of living and the intractably unaffordable housing market has motivated a significant number of Boomer parents to kickstart the wealth transfer process to their children early, but this act of generosity can open up a can of worms for both those in a position to give, and those lucky enough to receive.

The Productivity Commission has estimated that $120 billion per year is set to change hands between parents and their offspring, with 90 per cent as inheritances and the rest as gifts. This figure will increase as Boomer wealth continues to grow with unspent super. The same report estimates that the average recipient nets $125,000 in inheritance.

Inheritance can be a prickly issue, as disputes and challenges to wills continue to rise. Factors such as increasing wealth, perceived disparities among siblings and other close family members, complex family structures, blended families and de facto relationships, and poor estate planning all contribute to uncertainty in the desire to be “fair”.

The truth is, I wouldn’t wish an inheritance on anyone, but as generations get older, it’s a tough conversation many of us are having.Credit: Dionne Gain.

The prevalence of blended families, forms of cognitive decline including dementia, the potential for elder abuse and a growing community awareness of the right to challenge a will all combine to make the laws about inheritance so difficult. Moving forward with early inheritances can help resolve these issues, but only if done with careful consideration and correct documentation.

Meanwhile, studies show that 86 per cent of family provision claims are brought by immediate family members, including ex-partners; 74 per cent of these were successful.

Parents seeking to help their children gain a foothold on the property ladder or help with the cost of raising grandchildren may be more inclined to see their children benefit from financial assistance while they are still alive, but they don’t always account for complicating factors when they should.

One pertinent issue is that gifting money early does not prevent other family members from making a claim against deceased estates. In NSW, for example, “notional estate claims” can be made to consider assets distributed before the death of a testator back into the deceased estate. Those who are lucky enough to benefit from their parents’ generosity need to plan carefully if they want to preserve their wealth.

To achieve the desired result, adult children and parents need to start on the same page. Is the money a loan or a gift? A clearly drafted loan agreement, with terms and repayment conditions, offers some protection when it comes to claims by their children’s spouses or partners in the event of a relationship breakdown, for example. It can also be a safety net for parents, too, should their circumstances change.

This is a prudent step, since Boomers are living longer than ever and early inheritance can impact retirement savings and the Age Pension. If they choose to take the gift route, parents should be mindful of exclusionary or inequitable gifting of assets, to avoid costly battles among family members further down the line. They should be aware that there are limited protections available if their child separates from their partner, or some other life event occurs. The possible effects of ill-health, death and bankruptcy also need to be considered.

When parents are proposing to provide financial assistance by way of early inheritance, gift or loan, it is essential that the arrangements be properly documented by a solicitor, to make sure that everyone is clear on the details of the agreement.

Though there are no inheritance or estate taxes in Australia, capital gains tax does apply to inherited properties.

Many might think it’s not necessary to do this, that the cost is not well spent, or they are too embarrassed to talk about subjects like death, taxes, and inheritance, but a simple chat guided by an expert can do a lot to avoid future pain and strife. Seeking independent legal and financial advice should be done well before the money is advanced.

Parents should ask questions such as “will I need this money for myself later on”? “Am I being pressured to help my adult children”? and “Can I afford to help my children at this time”? If they intend to give money, they need to be comfortable with never being repaid. Though there are no inheritance or estate taxes in Australia, capital gains tax does apply to inherited properties.

Even if they formally loan the money, they need to consider whether they can afford to lose that amount. Would they ever sue their own child? Both parents and children will have to think about their tax liabilities.

When navigating a wealth transfer it’s incredibly important that everyone is clear on expectations and future planning.Credit: Illustration: Dionne Gain

Adult children (and their parents) must consider what happens if they separate from their partner, or re-partner and have to provide for children. They must discuss what expectations parents have in giving an early inheritance.

Any “strings attached” need to be aired – it should come as no surprise that most parents want a say in how their “gift” is used. The trick is to find a reasonable balance between the wants of children, parents’ desires, and the financial needs of both parties.

Sometimes, arrangements are made where elderly parents move into granny flats in their adult child’s house, funded either by the parents or their adult child. It is imperative when this happens that the questions about that are discussed, resolved and documented well in advance. The ownership of the property and the right to remain in residence, as well as care arrangements, need to be considered.

When navigating wealth transfer it’s incredibly important that everyone is clear on expectations and future planning. Seeking professional financial advice is a must if they want to avoid costly mistakes.

No-one wants a situation where they lose the family money before they get the chance to set themselves up for life, which is why estate planning needs to be a critical part of wealth transfers and hard conversations have to occur sooner rather than later.

Justin Dowd is head of legal development and growth for Watts McCray

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.