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With younger Australians increasingly locked out of the property market, many parents are feeling pressure to step in.
But doing so can compromise their own retirement plans – or even make them dependent on their children later in life.
“I don’t think I’ve ever met a client who didn’t want to help out their children, and the most common way is to help them buy a house,” says Andrew Barlow, wealth advisory partner at William Buck.
“Unfortunately, not everyone has enough to fund their own retirement, let alone support their children in buying a first home. You can also disadvantage your children by giving too much too soon.”
A question of timing
Beyond figuring out whether they can actually afford to help their child buy a house, Barlow says the first question he asks parents to consider is whether the child is ready to receive such a substantial gift.
“You want to ensure the child understands the value of a dollar and has the career drive and motivation to save, instead of making it too easy for them.”
Where there are multiple children, Barlow advises parents to assess each child’s readiness separately instead of feeling pressured to help them simultaneously.
“One way of proceeding is to help one child when they are ready and then provide an equivalent indexed amount to others when they are ready. We have also seen parents index the gift not by inflation but by the rising cost of housing.”
Never deplete your financial position to help your children unless you are financially secure.
Hayder Shkara, principal of Justice Family Lawyers.Considering the alternatives
If your child is not ready to take on the responsibility of a large cash gift or home ownership, or you cannot financially gift them such an amount, there are other meaningful ways to help them get ahead, says Barlow, including:
- Matching your child’s own savings dollar for dollar up to a certain amount;
- Paying for financial advice to teach your child the skills you wish you knew at their age;
- Making concessional super contributions, which sets your child up for retirement without enabling them to spend the money.
“If you have a child who would waste the funds, such as through gambling or drugs, then you shouldn’t give it in any form,” Barlow adds. Instead, he recommends ring-fencing that child’s share of your wealth and paying it out via a testamentary trust in your will.
“That would ensure the child receives the benefit of those funds, but they are managed by someone else for their protection. If, during your lifetime, that child improves their pathway, you could always provide the gift then.”
Advances and loans
If you have children of significantly different ages, or other parties whom you would like to support financially upon your death, consider treating housing funds as an advance, says Prue Vines, professor of law at the University of New South Wales.
“You can add a clause to your will that details the amount you have given them and states that it is an advancement on their inheritance. That will potentially help if the child becomes aggrieved upon your death because they received less in the will than others.”
For parents who have resolved to help their children achieve home ownership, but who are concerned that doing so will compromise their own retirement, another idea is to treat the funds as a loan, says Hayder Shkara, principal of Justice Family Lawyers.
“You could loan them the deposit amount, for example, with more favourable terms than they would receive elsewhere, and allow them to pay it back slowly. That would give them a boost, but you’re also securing your financial future. It’s a win-win.”
Such an arrangement, if formalised, would also help protect the wealth you have provided from adverse events in your child’s life, Shkara says.
“What happens if that child ends up getting divorced? Should their partner be entitled to a portion of those funds? Unless you clearly document things, the answer is yes.”
Regardless of the approach you choose, Shkara says the principle of ‘applying your own oxygen mask before helping others’ is paramount.
“Never deplete your financial position to help your children unless you are financially secure. Doing so can create problems for both you and your children if you live a long and healthy retirement.”
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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This story was created in partnership with Vanguard. The content is independent of any influence by the commercial partner.
