Helping family members financially is common. Parents may contribute to a house deposit, grandparents might support education costs, or relatives may step in during difficult times. These decisions are usually driven by generosity and emotion rather than a detailed financial analysis. But financial gifts can have far reaching consequences that are easy to overlook.

In this episode, we explore the key issues investors should consider before transferring money or assets to loved ones.

You can find the full article here.

Mark LaMonica: In today’s episode, we’re going to talk about the considerations before you make a financial gift, and Shani and I want listeners to know we are both available if you would like to give a gift to somebody.

Shani Jayamanne: I mean, to research for this episode, I asked Mark to give me a considerable financial gift and he declined. So...

LaMonica: Well, that’s not very nice of me. But anyway, we can still go through what you learned during your research even if we didn’t apply it.

Jayamanne: Yes. But there are many reasons why Aussies make the decision to give a financial gift for loved ones. So, it might be parents wanting to help their children out with housing deposits, which is very common for a financial gift. Grandparents may want to assist with education costs. Siblings might step in during periods of financial hardship. There are lots of reasons and plenty of circumstances that bring cause for a financial gift.

LaMonica: Now, if somebody gives you a financial gift to buy a house, you’re supposed to hide that, of course. And then you put your house up on Instagram and you say, look what I bought. Isn’t that the sort of millennial approach to these things?

Jayamanne: No comment, Mark.

LaMonica: Okay. Just asking.

Jayamanne: I don’t want to alienate all of my peers.

LaMonica: Okay. Well, there we go. So, the motivation for financial gifts is rarely a rational assessment of the best use of assets over the long term. So, we’re not really thinking about the most efficient path or making the most money. Financial gifts are often emotional decisions and they’re driven by the desire to help a loved one, which is great.

Jayamanne: But just because they’re not about thinking about the most efficient financial path, it doesn’t mean that there aren’t financial consequences. There’s tax law to consider. There’s pension rules and limits and there’s estate planning. And of course, there’s family dynamics, which we’re not the best place to talk about. But…

LaMonica: Exactly. So, we are definitely not experts in family dynamics. So, let’s focus on those other factors today and everyone – listeners can just deal with their own families. And what we’re going to focus on is what you should consider before writing that check or transferring the money.

Jayamanne: So, the first thing to consider is, is it really a gift? If there’s an expectation for the funds to be returned to you at some point in the future, it’s not a gift, it’s a loan. And this distinction does matter for a number of reasons. The first is that informal family loans can often become a major source of conflict when circumstances change. So, I’m going to make you go through an example of the sibling, Mark, as an only child.

LaMonica: Okay. And we’re talking getting the money paid back.

Jayamanne: Yes.

LaMonica: You’re supposed to give the gift and there’s all these strings attached.

Jayamanne: Yes.

LaMonica: But we’re just going to talk about purely a money standpoint. And I will now give the only child example. So, if your sibling loses their job and can’t afford their expenses, so you loan them $15,000 to cover those costs until they find a job. They get a job. They get back on track and you hear that they booked a lavish holiday to your favorite holiday destination. So, in your case, Shani, that would be Sri Lanka?

Jayamanne: I do love going to Sri Lanka.

LaMonica: There you go. And you’re going pretty soon. So, if they go and they booked this luxurious trip to Sri Lanka instead of paying you back. Well, what you soon come to realize is that you actually expected the money back, but you haven’t made those intentions clear up front.

Jayamanne: So, if it is a loan, this should be documented clearly with clear terms for repayment so there’s no confusion or awkward conversations that might damage the relationship. And so, with that out of the way, let’s move on to asking whether the relationship between people matters.

LaMonica: So, Australia doesn’t have a gift tax. So, if you’re gifting money, the person does not pay income tax simply because they’ve received a financial gift. So sometimes this creates the impression that who you give the money to doesn’t matter. In practice though, the relationship with the person getting the money, the recipient does matter. This is not in the eyes of the ATO. So not for tax reasons, but for estate planning, family law and government benefits. So, let’s go through how the nature of relationships can change the consequences of actually giving that financial gift.

Jayamanne: Okay. So, between spouses or de facto partners, they’re treated differently from gifts to other family members, especially for estate planning and family law, as Mark said. So, from an estate planning perspective, gifts that are given are considered a shared financial pool of the relationship. And that’s even if it’s held in one person’s name. So, courts and estate planners may look beyond legal ownership to determine beneficial ownership and intent.

LaMonica: So, when this really matters is that if you’re gifting funds to a partner, it does not always remove the asset from your broader financial position. So, if there is a death or a relationship breakdown, those assets may still be taken into account when determining how property is divided or how a state is administered.

Jayamanne: And this is particularly important in second marriages or blended families. Gifting assets to a new partner without estate planning considerations can unintentionally change how wealth is ultimately distributed and it can impact what is distributed to children from a previous relationship.

LaMonica: And then there’s gifts to adult children and inheritances. So, this is one of the most common forms of financial assistance. And gifts that aren’t properly documented can form a basis for a will contest later in life. So, if you’re giving or receiving a gift early in life and a comprehensive and clear estate plan hasn’t been implemented, you might see it when somebody contest the will.

Jayamanne: And in some cases, disappointed beneficiaries of an estate can argue that earlier gifts were earlier inheritances or that some were unfairly disadvantaged. And fairness will be dependent on your family dynamics. Some families are comfortable with unequal support, while others place a high value on equal treatment regardless of circumstances. And obviously, these decisions aren’t governed by law, but they can have a far greater impact on family dynamics.

LaMonica: Now, we did mention, Shani, that there is not a gift tax in Australia, but that doesn’t mean that there aren’t potentially tax implications. It can still trigger indirect tax consequences.

So, we’ll go through an example. The gift is funded by selling an asset. So, shares, ETFs, property, et cetera. You may have capital gains tax applied. This tax isn’t because you gifted the assets. It’s because you sold to create cash.

Jayamanne: Gifting assets directly without liquidating to cash can also mean CGT. Transferring shares or property to another person is generally treated as if the assets were sold at market value, even if they weren’t given in cash.

LaMonica: And then for the person receiving the gift, some assets generate income. So, once you’ve gotten the asset, you’re liable for the tax on any of that income that’s generated in the future. So, for example, we have dividends from stocks, rent from property, or capital gains. All of that will be taxable. And this might actually be a net benefit if the recipient is on a lower marginal tax rate, but can also impact their own tax position and eligibility for government benefits.

Jayamanne: So, the most common way that assets are received is they are inherited after passing, which have different rules than gifts given before passing. And I’ve written articles both about the implications about inheriting a house and for inheriting shares. So, you’re able to find that on the website or through the original article that’s linked in the episode notes.

LaMonica: Okay, Shani, we’re going to talk about Centrelink. So, if you or your partner receives Centrelink benefits, such as the age pension, gifting is subject to limits. You can gift up to $10,000 per financial year or up to $30,000 over a rolling five-year period without affecting any of those entitlements. Any amount above these limits is treated as something called a deprived asset. That means that Centrelink continues to assess the funds given as if you still own them for five years. And these rules apply regardless of who receives the gift. So basically, the government doesn’t consider the recipient and only considers whether the gift reduces the assets available to support the gift giver.

Jayamanne: And I understand that this may seem counterintuitive to a lot of people in retirement. Helping family is often not viewed in the same lens as helping others. Helping family feels like an integral part of your living costs. After all, most of the time it is given to children who have been financially dependent on you for a large part of their lives. But from a policy perspective, allowing unlimited gifting to close relatives would undermine our welfare system.

LaMonica: Okay. So, let’s move on and talk about something that Shani wants to put me into and that is aged care. So older Australians that are receiving aged care, gifting can also impact the fees that they owe.

Jayamanne: I mean, I feel like I have like a quite a romanticized view of aged care. Like you have all your meals taken care of, like you’re with your friends all day.

LaMonica: Have you been in an aged care facility?

Jayamanne: The characteristics of it sound appealing.

LaMonica: First of all, you like cooking. So, I don’t know why it’s attractive to have all your meals prepared for you. And you also like being alone a lot. So, I don’t know if your friends all around you…

Jayamanne: I would imagine I have my own room, you know.

LaMonica: Oh, your own room like a big girl.

Jayamanne: Yes.

LaMonica: Well, there we go. All right. So, tell us about aged care. I mean, other than all the great things about aged care that you that you’re looking forward to.

Jayamanne: Okay. So aged care assessments consider income and assets. Gifts made within the past five years still may be counted towards the total and this could increase the fees payable, even if the money has been given away and spent.

LaMonica: All right. So, one last thing to note. So, Shani, when you wrote this article, you had a simile for financial gifts. And just like those safety messages you get on a flight that nobody listens to, apply the oxygen mask to yourself before you apply it to others.

So, what you’re trying to say there, Shani, is mostly I think that you wanted to get on a plane. But you were saying make sure that you consider your own financial security before you start gifting to loved ones, even if they are struggling. So, this is really important for people who have already retired when you’re no longer receiving a salary or wage.

Jayamanne: So, before you make a significant gift, just ensure that you’ve carefully planned and considered whether you have comfortably funded your own retirement fully. On top of this, ensure that your emergency savings are topped up and can handle unexpected changes to health or your investments.

LaMonica: And what’s really important, of course, is any gift that you give, give that gift with intention and generosity is always best when it’s sustainable and informed. Just like the gift I gave you today of a Kit Kat Bar.

Shani did not like it. So, you need to make sure that as well as good intentions, you’ve also considered tax, Centrelink entitlements, aged care, estate planning, and of course, family dynamics.

Jayamanne: And always gift with a perspective that you’re not going to get that money back. The last thing you want is an act of generosity and love to cause unintended consequences and stress.

LaMonica: All right. Well, thank you guys very much for listening. My email address is in the show notes. If you want to outline the gift you’ll be giving to Shani and us, just shoot me an email. Thank you very much.

Here are a few more resources for investors looking to navigate family and money:

Are private school fees worth it? Shani looks at what you’re giving up by sending your kids to private school.

You can find the podcast episode below:

Want to set up your child for life? Joseph explores how to (almost) set up a child for life with $46 per week.

Are education bonds a tax effective way to save for your children and grandchildren’s education? Shani takes a look at how it compares to other investment structures.

Balancing potential parenthood and finances? Sim explores whether Millennials afford to have children.

Estate planning

Thinking about estate planning? Noel Whittaker gives some great advice in Estate planning made Simple Part I, Part II and his interview with James Gruber.

Having tough conversations? Get some tips on how to talk to your family about your will.

Avoid common mistakes: Avoiding wealth transfer pitfalls and how to create an airtight will when more than 50% of wills are contested.

What are the documents you need to protect yourself and your family? These are the essential documents to give you peace of mind.

Inheritance

How to incorporate an expected inheritance into your financial plan. The intergenerational wealth transfer is a hot topic. How should you incorporate any inheritances into your financial plan?

You can find the podcast episode for this article below.

Your inheritance will likely be a house. What should you do with it? Shani looks at the implications of inheriting or bequeathing property. Shani also takes a look at your options when you inherit shares.

Should you give your children their inheritance before you die? The issue is likely to be aired more often as Baby Boomers in Australia get older, die richer and leave behind larger bequests.

Invest or pay off your mortgage? This Investing Compass episode explores what you should do when you receive an inheritance.

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A message from Mark and Shani

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