Things to think about before gifting your kids money

Things to think about before gifting your kids money

Written by James Weir

James specialises in the theory and best practice of portfolio construction and management. His success within national and international investment banks led him to become a Co-Founder of Steward Wealth and he is a regular columnist for the Australian Financial Review.
August 2, 2018

It’s natural that a parent would like to be able to help their kids out financially, especially if it’s to get a foot on the property ladder when even that first step can seem so out of reach these days. But you need to think carefully before you hand over a couple of hundred thousand dollars because if things go pear shaped a big chunk of that money could disappear.

Let’s imagine you give your child $100,000 to put towards buying a $1 million house, then not long after your child meets a partner and they move in together. If they end up marrying or the relationship becomes de facto, which according to the Family Law Court is after at least two years, but the relationship falls apart, your child’s ex can make a claim for a financial settlement. It’s possible your kid’s ex could get half the house, including half the money you gave your own child.

And if it’s your son and there’s a child involved the financial settlement can be a long way from 50/50. Within a few years of a very generous gesture, a big chunk of the money could well have gone.

It is apparently possible that a Family Court Judge will make an allowance where the relationship didn’t last very long and they conclude the spouse doesn’t really deserve to share in the money the parents gave. But that is far from certain.

There are two things you can do. First, rather than gift the money to your child, lend it to them. The value of the loan will be excluded from financial settlement proceedings. You want to make sure the deal is characterised as a loan from the outset and the smartest way to do that is going to the trouble of getting formal loan documentation drawn up by a lawyer so if there’s a dispute the courts will be left in no doubt what the arrangement is.

You can even lodge a mortgage against the property, with specific clauses requiring that any partner must enter an agreement with respect to the money.

The second approach is to have your child’s new partner sign what’s referred to under family law as a “Binding Financial Agreement”, pretty much the equivalent of what is popularly referred to as a ‘prenup’. Your child’s partner would have to acknowledge the money you’ve given and agree that it’s not to form part of any financial settlement in the event of divorce or separation. This is much easier if the money is used for something readily identifiable, like a house deposit, but it can get more complex if it’s intermingled with other money.

Again, the wording of such an agreement has to be quite specific and certain protocols have to be met, like having the signatures witnessed by a lawyer or Justice of the Peace, so it’s pretty much a necessity to use a lawyer.

It’s worth bearing in mind that it’s not just a relationship breakdown where the money you gave can end up in someone else’s hands, if your child goes bankrupt their creditors can end up with it too. Here again, having the money tied up in a formalised loan should protect it.

There are two other considerations: if you’re receiving a government pension, under the so-called ‘$10,000 rule’, Centrelink will look at gifts and transfers exceeding $10,000 per year, or $30,000 over five years, when calculating whether you qualify under the assets test. This includes paying school fees.

Secondly, if your child is taking out a loan to buy the property a lender is likely to want to know if the deposit is being part-funded by someone other than the borrower, and it would be a really bad idea to fudge things in an effort to make it easier for your kid to get the loan.

Helping your child out financially should be a heart-warming experience, taking a few precautions can help stop it turning into a gut-wrenching one.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product. You should also obtain a copy of and consider the Product Disclosure Statement before making any decision on a financial product. You should seek advice from Steward Wealth who can consider if the general advice is right for you.

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