What to consider before giving an early inheritance

As our population continues to age, early inheritances are on the rise. This is where the testator – the person who gives the inheritance – is alive at the time of passing on their fortune.

It’s becoming an increasingly popular option as parents and grandparents look at ways to help their offspring onto the property ladder or with the rising cost of living. Around $3.5 trillion in assets are expected to be passed on between generations by 2050.

From tax implications to funding aged care, there are a few important factors to look into when it comes to early inheritances.Credit: iStock

Ellen Bradley is a legal director at Canberra law firm Bradley Allen Love. She and her team specialise in all things estates, including administration, securing grants of probate, as well as estate-related disputes and litigation.

An ageing population means there is a greater delay in when children receive an inheritance. Most of Bradley’s clients are in their 60s when their parents pass away.

People in more fortunate financial positions might want to help their children, grandchildren or others earlier; when they’re at the stage of establishing themselves, giving a sum of cash for a property deposit or to help start a new business.

“Even with a professional, well-paid job, the property market – for example – can be difficult to enter without financial assistance,” Bradley says.

‘Early inheritance syndrome’ manifests in children who feel an entitlement to funds or assets.

There are a few other potential benefits. Giving an early inheritance reduces the value of someone’s estate when they pass away and therefore the amount of what might be subject to a claim.

“However, NSW has a concept called notional estate which enables some transactions to be undone and clawed back into the estate if they occur within a certain time before death.” Organising an early inheritance might also simplify some of the admin for families after a loved one passes.

What to watch out for

There are a few crucial things to look into when deciding whether to give an early inheritance, Bradley noting the process is not as straightforward as it sounds.

She says the priority should always be the financial security of the testators, factoring in how expensive aged care can be. People should prepare to have sufficient funds available for the care and services they might need.

Of course, not knowing what health issues might arise (and when) makes this difficult to calculate. But practically, the greater someone’s wealth, the more options they will have in terms of aged care, whether that is in a formal residential facility or at home.

If a parent decides to transfer a large asset to their child, they generally lose control of the asset. If a child wants to then assist their parents as they age, it can be difficult to provide housing security and fund their ongoing care.

People should also be aware of tax implications. “There are exemptions from stamp duty payable on residential property if that property is transferred in accordance with a will. Those exemptions are not available if the transfer occurs while all parties are alive,” she says.

“Similarly, there is roll-over relief from the payment of capital gains tax if an asset is transferred in accordance with a will. If a transfer occurs while all parties are alive, and the asset has increased in value, the parent is likely to be hit with a large tax liability even though they have received no money from the child for the transfer of the asset.”

There are also rules on gifting money or assets if someone receives a means-tested age pension. These should be looked into to ensure an early inheritance is not in breach.

Testators should consider how early inheritances might affect their wills, especially in the case if there is more than one beneficiary and only one is given an early inheritance.

“If the parent’s intention is to treat all children equally, their will should include a clause that ensures all benefits are equalised between the children, regardless of whether the benefits were given during the parent’s lifetime, on their death or a combination of the two,” Bradley says.

Bradley highlights if a beneficiary is in a relationship, testators should consider what would happen if that relationship ended. People ought to consider whether anything should be done to ensure an inherited property doesn’t enter a pool of assets divided during settlement.

Another option could be organising a loan arrangement, which is not as vulnerable to settlement proceedings.

While some people are eager to give an early inheritance and initiate this, there are also instances of “early inheritance syndrome”.

“That is manifested in children who feel an entitlement to funds or assets, knowing that eventually they will belong to them.”

“These children fail to appreciate that until someone dies, and the estate is administered, they have no legal entitlement to assets.”

There are concerns that early inheritance syndrome can lead to financial elder abuse. Bradley says, “as professionals, we have obligations to ensure that any clients discussing giving an early inheritance are doing so without influence or coercion”.

• Advice given 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.

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