Most parents and grandparents would love to make life a little easier for the next generation. Paying for school costs, chipping in for a first home, setting up an investment in their name: the ways to help are almost endless.
Generosity doesn’t always come without strings, though. Depending on how you go about it, you could end up with a tax bill you weren’t expecting, or put your own home on the line. So before any money changes hands, it pays to think about what you actually want your help to achieve.
If education is the goal
One of the most common worries is making sure money meant for a child’s education gets spent on exactly that. The good news is there’s a whole category of investment products built for this.
Often called education savings plans, they let you put money aside now and have it pass into your child’s name at an age you decide. Plenty of them keep fees low, and the funds can cover a surprisingly wide range of costs. Think school books and uniforms, paying down a HECS debt once they’ve finished uni, or even that trumpet and the lessons to go with it.
Not every plan works the same way, so compare them carefully before you commit. Picking the right structure is something we regularly help with as part of our wealth creation advice.
If it’s their first home
Getting a deposit together is a real struggle for a lot of young Australians, and first home buyers across Newcastle and the Hunter are no exception. It’s little wonder more families are pitching in.
Going guarantor
A family guarantee loan lets you help without handing over any cash. You, or another family member, offer your own home as security over part of your child’s mortgage, which usually lets them borrow with a bigger effective deposit.
It sounds painless, but the risks are real. If your child falls behind on repayments, you could be on the hook for the whole loan, not just your share. And if they default and the lender sells the property for less than is owed, your own home could be at risk.
Lending them the deposit
If that level of exposure makes you uneasy, lending your child the deposit money is a lower-risk alternative for your own assets. Paired with the First Home Owner Grant, a loan from Mum and Dad can make a big difference to how their mortgage plays out over its life.
If you’re thinking about tax
Here’s where good intentions can backfire. Many families know that splitting income between family members can lower the overall tax bill, and it’s tempting to hold investments in the kids’ names for exactly that reason.
The Australian Taxation Office (ATO) is well aware of the idea. To stop parents shifting money to their children just to save tax, it taxes passive income from investments held by anyone under 18 at higher rates. The takeaway is simple: talk to your adviser before you put any investment in a child’s name.
Get clear on the why first
Whichever way you want to help, start with a clear objective. Education, a first home and a long-term investment all call for different approaches, and choosing the wrong one can cost you in tax or leave your own finances exposed.
For more background, ASIC’s MoneySmart website covers saving for children’s education and loans between family and friends.
Helping the next generation while protecting your own future is something we work through with families across Newcastle and the Hunter as part of our financial planning service, often alongside retirement planning so the numbers work for everyone.
Talk to Virtuous Wealth
If you’re keen to help your children or grandchildren get ahead and want to do it the right way, we’d love to have a chat. Get in touch with our Newcastle team to book a no-obligation conversation.
This article provides general information only and does not take into account your personal objectives, financial situation or needs. Before acting on any information, you should consider its appropriateness, having regard to your own circumstances, and seek personal financial advice from a licensed adviser.
