Providing an ‘Early Inheritance’: A trend I am seeing among clients

In recent years, a noticeable trend has emerged among clients: a preference for providing financial assistance to their children earlier rather than waiting until their passing. This shift towards what is often termed an “early inheritance” can have significant implications, particularly when it involves substantial expenses like home purchases. While the intention to help children achieve their homeownership goals is admirable, it is crucial for clients to ensure their own retirement security remains intact before making such financial commitments.

Ensuring a Secure Retirement

Before deciding to provide significant financial support to children, it is vital to assess our clients own financial stability. Key considerations include:

1. Evaluate Retirement Savings: Clients should have a thorough understanding of their retirement savings and projections. This includes assessing superannuation balances, expected income streams, and potential future expenses. It’s important to ensure they have sufficient funds to maintain their desired lifestyle throughout retirement.
2. Longevity and Health: With longer life expectancies and potential health issues, it is important to plan for the possibility of living longer than anticipated. Adequate insurance coverage, including health insurance and long-term care planning, should be factored into retirement strategies.
3. Review Investment Risks: Withdrawals for early inheritance can impact clients' investment portfolios. We help clients understand how these withdrawals might affect their long-term investment growth and retirement plans.

Structuring Financial Assistance: Gifts vs. Loans

When clients choose to assist their children, they generally have two main options: gifting the money or providing a loan. Each option has distinct implications:

Gifts:

1. Relationship Breakdowns: It is important for clients to understand what happens in a relationship breakdown when providing gifts to children and the impacts around this. There are ways that clients can look to protect the family money, however, it can be a sensitive area which needs to be managed carefully.
2. Impact on Estate Planning: Large gifts can reduce the value of the client’s estate. When multiple children are involved, it is important to properly and clearly document this as part of the client’s estate planning process to help avoid future family disputes.

Loans:

1. Interest Rates and Terms: If clients choose to provide a loan, they should establish clear terms, including interest rates and repayment schedules. It’s critical to document the loan agreement formally to avoid potential future disputes.
2. Loan Assessment: When providing a loan to children and they are also entering a loan agreement with a bank, it is important to understand how this may impact their serviceability also.

Additional Considerations

1. Impact on Family Dynamics: Significant financial assistance can sometimes lead to familial tensions or expectations. It’s important for clients to communicate openly with family members about the financial support and its implications to avoid misunderstandings.
2. Legal and Financial Documentation: Whether clients choose to gift or loan money, working with legal and financial professionals is crucial to ensure all documentation is correctly prepared.
3. Monitoring Financial Plans: Regular reviews and updates to financial plans are essential, particularly after making significant financial decisions like an early inheritance. This helps ensure that providing assistance does not inadvertently jeopardise the client's financial security.

The trend towards providing early inheritance to assist with significant life events, such as home purchases, reflects a generous and proactive approach to family support. However, it is crucial for clients to prioritise their own financial needs and retirement security before proceeding. By carefully evaluating their financial situation, selecting the appropriate method of assistance, and seeking professional advice, clients can navigate this complex decision in a way that supports both their future and their children’s goals.

As a financial adviser in Australia, guiding clients through these considerations ensures their financial well-being and legacy are preserved while enabling them to support their loved ones effectively.

Disclaimer: The information contained in this article is general in nature and does not consider your personal circumstances. You should consider whether the information is appropriate and, where suitable, seek professional advice from a financial adviser.