28 Sep The Cost of Gifting Money to Children
As parents, and even grandparents, one of the ways we like to give to our children is through money or financial assistance. There are, however, a lot of issues that can arise when it comes to gifting money. It’s always best to get advice on the situation and consider not just the effect it will have on your own financial stability but also about what happens if a situation changes, such as a divorce or bankruptcy. Let’s take a look at what ‘gifting’ money involves, what to consider and why you should properly document any gift (or loan) to your children.
What is gifting
‘Gifting’ money to your children or grandchildren is exactly that – a gift. Monetary or not, anything that is given to a child or your children without any expectation and without any tie to a business or work activity is simply a gift.
Why you should document ‘gifts’ as a loan
There’s a multitude of reasons family members gift money, such as to help with a first home, a car, support for school or university. While it can be a great helping hand for your loved ones, there are also many reasons why you would properly document this gift as a loan, protecting it in case of:
1. Divorce
2. Bankruptcy
3. Drug addiction
4. Mental conditions
5. A breakdown in the relationship between you and the recipient
6. No longer being financially stable yourself
How to document any gifted money
Whether the money is a gift or not, it should always be treated as a loan that is ‘payable on demand’. This not only protects you in the case of the above scenarios but also protects your children. You should always discuss any loans with all of your children, and make everyone aware of any ramifications or reasoning behind them. It’s worth noting that if one child is favoured with a loan of some kind over another, it will be automatically be adjusted to be fair and equitable for all children at the time of your death. For example, if you gift or lend one child $50,000 for a house deposit and the other child $100,000 then that is adjusted at your death so that it is all equal again.
Never rely on homemade loan agreements or IOUs, even between family. No matter how close you are today, you cannot predict the future and it’s better to be safe than sorry when dealing with large sums of money. Chat to your accountant or give us a call at Conrad Carlile and we can arrange a legally prepared and binding Loan Agreement through a law firm.
When it affects your retirement
Before gifting money to your family members, it’s important to understand how it can affect you financially, especially if it may impact your age pension and any other entitlements you may need. There is no gift tax in Australia, but there are some rules you need to follow if you don’t want the gift to affect any payments you may be eligible to receive from the government, such as pension payments. Through the means testing process, both individuals and couples (combined) can give up to $10,000 in cash gifts each financial year (up to $30,000 within a 5 year period). This means that your financial assets would decrease through means testing and your government benefits amount may therefore increase. Gifting money over this amount will cause Centrelink to treat the money as a ‘deprived asset’ and it will still count towards your means test, potentially reducing your entitlement.
If you have any questions about gifting money and any implications it may have for your financial situation specifically, please contact our helpful team at Conrad Carlile Taxation & Business advisors on 07 3871 1522 or send an online enquiry through our website.