Grandparents really are the jewels in the crown of our community. Having raised their own children, many are now helping raise their grandchildren. This often extends to providing financial support to the grandkids. If you’re in this situation, how can you make sure your generosity is as financially effective as possible?
If you’re a grandparent, there’s a big chance you’re involved in the upbringing of your grandchildren. According to recent research, one in ten of those over the age of 65 in New South Wales look after their grandchildren full-time on an unpaid basis, with this figure reaching 20 per cent in some areas of the state 1. And that’s just the figures for NSW.
But we don’t just rely on grandparents for hands-on help – many families also count on them to provide financial support. At the moment, there are no formal statistics about the monetary support grandparents give their grandchildren, and also their own kids. But anecdotal evidence from the financial advice community suggests grandparents are helping out their grandkids with, for instance, money for their first car or funds for a deposit on their first property. Some are even contributing to their grandkids’ mortgages.
Given the increasing financial reliance of families on older generations, a growing number of people are looking for help to find out the best way to use their money to help their grandchildren.
If you’re helping out the grandkids financially, it’s a great idea to talk to a financial adviser about how to take advantage of incentives such as the First Home Savers Account, or how to employ clever strategies like using investment income to help pay down a family member’s mortgage. Your adviser can also help navigate the financial system so the whole family realises the highest benefit possible from your generosity.
Considering the right questions
If you’re helping out younger generations financially, one of the most important considerations is making sure the right money ends up in the right hands at the right time. But this will mean different things for different people, depending on their unique circumstances.
It’s very important to consider the goals you are trying to achieve by helping out the family. That’s why it can make sense to work with a good financial adviser, who may spend a great deal of time asking questions, listening and probing to uncover what you want to achieve by helping out your family.
This assists the adviser to design the right strategies to help you achieve your goals. For instance, let’s say you want to help your grandchildren with their first home. Things your financial adviser may consider with you include:
- whether you want to help pay for the deposit and/or repayments
- whether you want to invest this money now or at retirement, or include it in your legacy
- how much money is available after you have provided for your own retirement
- whether your grandchildren are financially dependent on you.
The answers to these questions may lead down very different structural tracks such as family discretionary trusts, testamentary trusts or gifting to maximise tax efficiency, and to make sure you don’t trigger any adverse consequences. Whichever form it may take, your financial adviser can help you structure your generosity in a way that suits you and your circumstances.
Six key issues for grandparents
There are numerous factors your adviser may look at when working out the best strategy for you and your family. But here’s a checklist of six of the major issues you may need to consider if you want to help out your grandchildren:
Age and income of the grandchildren
Investment income for minors can be taxed at penalty rates. Whereas, for people over the age of eighteen, investment income up to $20,542 may be tax free. This can be a particularly important consideration if you’d like to help contribute to education costs.
If you receive a pension or partpension from Centrelink you may only be able to gift up to $30,000 every five years, to a maximum of $10,000 per year, without adversely affecting your entitlements.
The right team of experts
The role of a financial adviser is often to project manage a team of experts. So it’s an idea to ask your adviser if he or she has a network of other specialists such as lawyers to ensure you are receiving holistic advice.
Although it’s hard to do so, it’s worth thinking about the risks associated with potential relationship breakdowns in the family, such as sibling rivalry and divorce of any family members. This could mean a gift for a grandchild ends up as an asset to be fought over in the courts. It might be worth talking to your adviser about the appropriateness of testamentary trusts or drip feeding financial assistance rather than gifting lump sums.
Pay yourself first
It’s easy to fall into the trap of being too generous and not properly considering your own living and lifestyle needs in retirement before deciding how you will help out your family. So make sure your own financial future is secure before committing to help out your family.
Manage family risk
Families are often called on for help in the event of illness and injury of a child or grandchild. So you may want to consider talking to your family about how you can help to pay for your insurance premiums to help protect your grandchildren, depending on what is appropriate to suit your and your family’s situation.
As you can see, there are a multitude of elements to consider when helping out your family financially, and your financial adviser is well placed to help you make the most of this.
1 ‘Grandparent Carers’, Council on the Ageing NSW (COTA), 2013