Are you thinking of giving or lending money to adult children (or other family members) who are in financial hardship?
Parents are often called on to help during times of crisis. Now, with a growing number of people experiencing financial hardship as a result of the coronavirus pandemic (COVID-19), there’s an increased chance that parental assistance might extend to financial support.
Money can be a very emotional thing, particularly when you get family involved. The reality is, we all want to help our kids and our first instinct is to provide assistance if they’re in need. We just need to do so prudently.
If you’re considering giving or lending money during the COVID-19 crisis, here are some things to think about.
Exceeding gift limits to children may affect your Age Pension
The current Age Pension rules allow you to gift up to $10,000 per financial year, to a total of $30,000 over a rolling five-year periodi. For instance, you may choose to take a lump sum from your retirement savings to do this.
If you give away amounts above these limits, the excess will still be counted as an asset of yours, and subject to deeming under the income test for 5 years, so you may not receive the increase in Age Pension that you might otherwise expect.
This means you can’t give away $100,000 and then suddenly go on the full Age Pension. The limits allow people to be generous, but at the same time not artificially qualify for a higher Age Pension as a result of giving all their money away.
Explore financial hardship assistance before giving
COVID-19 hasn’t altered any of the current rules regarding giving, but it has opened up more options for people in financial hardship, which may prevent the need for assistance in the first place.
Your children [now] have access to a lot of avenues for financial assistance before they need to draw upon the bank of Mum and Dad. Have they applied for the JobSeeker payment?
Your children may also be able to access money from their superannuationii. They need to do this with care, but it’s another avenue that your children may have available.
There’s also more affordable access to educationiii for upskilling and additional measures for rental relief. It might be worthwhile exploring these options if your children are experiencing financial difficulties before you turn to giving.
Setting boundaries if you do help out
If you’re thinking about giving money you should be prepared to communicate clearly. You want to make sure that everyone is really, really clear: the money that I’m providing to you, is it a loan or is it a gift? Communication and clarity are absolutely vital. If it’s a loan, set clear expectations about how and when it will be paid back.
If you don’t have a formal legal contract, it’s important to retain emails or text messages that state your intentions, including the payment arrangement.
It’s also important to note, if it’s a loan, Centrelink will treat it differently to a gift. While the gifting limits discussed above will not apply, the outstanding balance of a loan will be counted as an asset. Further, the outstanding balance will be treated as a financial investment and subject to the Centrelink deeming under the income test until it is repaid.
Keeping things fair
If you have more than one child and you’re only providing financial assistance to one of them, you may want to give some thought to how you’re going to respond to another child saying, ‘You helped Jenny, can you help me?’
It’s important to think about whether each of your children needs help. Or if you could prepare an explanation as to why you’re only extending financial generosity to one family member.
When making a decision about gifting or loaning money, it is important to bear in mind:
- That you’ll be foregoing the opportunity to earn any income or potential growth from the amounts you’ll loan or give away
- That there may be implications to your estate planning to consider
- Any potential tax implications or costs you may incur if you need to sell assets to raise the gift or loan amount.
We can help
Before making any decisions, it may help to speak to us – we’re here to help you manage the effects of COVID-19 on your financial situation.
i Services Australia, How much can you gift
ii Australian Taxation Office, COVID-19 early release of super
iii Department of Education, Skills and Employment, Higher Education Relief Package
©AMP Life Limited. First published April 2020