Giving large gifts to your children before you die: make sure you avoid unintended consequences
It is not uncommon for parents to provide financial assistance to their children (and sometimes their grandchildren) during their lifetime, rather than having the children wait until their parents pass away to receive their inheritance. For example, parents may pay the deposit for the purchase of a house, pay off a housing loan or pay the grandchildren’s private school fees.
Unexpected income tax or capital gains tax liabilities
Unfortunately, the generosity of parents can sometimes create problems both for them and for their children. For example, what if the gift creates an unintended income tax or capital gains tax liability for the parent?
Wisdom in hindsight is no solution in this scenario. A generous parent who suddenly realises the tax implications of the large gift they gave cannot reverse the transaction and restructure it in such a way as to minimise the tax liability.
Favouritism can lead to court battles between siblings
Parents sometimes decide to give a gift to one or more of their children but to exclude their other children from that gift. It can also happen that parents transfer control of a family business to one or more children, to the exclusion of other siblings.
The unfortunate consequence of such actions can be that the siblings who missed out on a particular gift make a claim on their parents’ estate after their parents pass away. The likelihood of such a claim succeeding can be minimised if appropriate estate planning strategies are put in effect at the time the gift is made.
Impact of giving large gifts on social security benefits
In my experience, a common unintended consequence of giving away assets to children is that it unexpectedly affects the parents’ pension entitlements or other social security or veterans’ affairs benefits.
It is important to be aware that the gift is still treated as part of the parents’ own property for a number of years after being given away to the child, and will therefore still be taken into consideration for the purposes of the assets test after the gift is made.
What happens if the son or daughter’s marriage breaks up?
In the case of parents who generously pay the deposit for the purchase of a property for their son or daughter, or who pay off their housing loan, a depressingly common scenario is that the child’s marriage or de facto relationship breaks up and their ex-partner successfully claims half of the gift that was given by the parents.
It is also not uncommon for a gift from a parent to be claimed by creditors in the event of a business failure.
Given that no-one knows the future, it is prudent for the parent who wants to pay for their offspring’s property deposit, or pay off their mortgage, to structure the transaction as a secured loan, rather than an outright gift. Such an approach makes it less likely that the gift will end up in the hands of someone for whom it was not intended.
Seek professional advice and make sure transactions are properly documented
To ensure that these and other possible problems are considered and properly addressed, it is important that parents seek appropriate legal and financial advice before making a substantial gift to their children.
The risk of such problems arising, and the impact of those problems if they do arise, can be removed or at least minimised if the relevant transactions are appropriately documented. In matters such as this, the old idiom that “the devil is in the detail” certainly does apply.