Should You Pass on Your Inheritance Early?
Would you rather leave an inheritance to your family after you pass away – or give some of it to them now, when you can see the difference it makes?
It’s a question many retirees are considering as younger generations face rising property prices and cost-of-living pressures. An early inheritance could help an adult child buy their first home, fund a grandchild’s education or achieve another important milestone.
But before giving away a significant amount of money, you need to be confident that your own future remains secure.
The Wealth Designers Senior Wealth Adviser Dawn Thomas recently joined The Advisory on AusBiz to discuss the benefits and risks of passing on an inheritance early.
Here are some of the key considerations she shared.
The baby boomer wealth transfer
The great baby boomer wealth transfer is expected to take place over the next couple of decades – but there are several reasons people may want to expedite the process.
As Dawn explains in the segment, many retirees want to enjoy seeing the impact their inheritance could have on the lives of their loved ones. Giving some of their inheritance early may also allow them to have a say in how the funds are used.
Some retirees also feel a sense of guilt about their financial position – especially when they see their children struggling – and want to help them achieve important milestones.
But, as with any significant financial decision, careful consideration is needed. Before gifting money to younger generations, it’s important to make sure your own future is protected.
Dawn also notes that Centrelink’s gifting rules should be factored into the decision. If you give away more than the allowable amount, the excess may continue to be counted under the income and assets tests for five years. While this could temporarily affect your entitlements, after five years the gift will no longer be included in the assessment – so it may simply be a matter of understanding and planning for the short-term impact.
What should you consider before gifting?
One of the biggest barriers to giving family members an early inheritance is uncertainty about the future.
Retirees may be concerned about unexpected health issues, the possibility of needing residential aged care or simply living longer than anticipated. It can be difficult to know exactly how much money you will need throughout retirement – and giving away too much too soon could limit your options later.
Another common concern is the possibility of a relationship breakdown within the younger generation, which could cause some of that wealth to exit the family.
There may also be uncertainty about how younger family members will spend the money. Parents might worry that their children will be frivolous or won’t use the funds in the way they had hoped.
There can be a real difference in attitudes between generations. Someone who has worked hard and carefully managed their money may feel nervous seeing their children take multiple holidays or spend in ways they wouldn’t choose themselves.
Offering greater peace of mind
This is where an honest conversation involving the entire family can help.
Dawn explains that if parents know the money will be put towards something they value – such as education for their grandchildren or a deposit on a first home – that may provide the assurance they need.
These conversations can also clarify whether there are any expectations attached to the gift and whether it will affect the recipient’s eventual inheritance. This is particularly important if other family members may perceive the arrangement as unfair.
Families may also wish to seek legal advice about how the money should be transferred and whether any formal agreements or protections are appropriate.
Protect yourself before you gift
Baby boomers have worked hard to build their wealth and should be able to enjoy their retirement. The key is understanding how much you may need in the years ahead before deciding what you can comfortably afford to give away.
A significant amount of wealth is often tied up in the family home. For some people, selling or downsizing may provide a way to release funds and pass some of that wealth on – but this decision still needs to be considered as part of their broader retirement plan.
The key message is to know how much you need and protect yourself before you gift.
If you’re considering giving your family an early inheritance, we can help you understand how the decision could affect your retirement plan. Book a chat with our team to start the conversation.
Want to know more? Discover more about our team and our approach to helping you live a life with money and meaning.