Family wealth can take a lifetime to accrue, but can also disappear in an instant through poorly considered generosity.
Many parents and grandparents are often willing to help younger generations with funds toward a house or education. It’s a wonderful gift – but there can also be some serious traps.
The person who receives the funds (called the “beneficiary”) needs to ensure that any early inheritance isn’t later caught up in a matrimonial or estate planning dispute, just because it hasn’t been thought through.
Here are two strategies to help you avoid losing your accrued family wealth, and still be generous!
Strategy 1 – ‘Family Friendly’ Loan
One way of safeguarding the transfer of assets and protecting family wealth is through a family friendly loan rather than a straight gift. These types of loans are preferred by parents who are looking to help their children but at the same time are unsure of their own future financial requirements.
Here’s the big advantage…
If a child has a failed relationship, the funds given to the child would in most circumstances end up in the pool of funds that are split. So, your family money could very quickly end up with another family.
Instead of a gift, a properly documented loan to a child could protect the assets from becoming part of a child’s divorce settlement. In the event of a child’s divorce, the loan could be recalled to avoid it becoming part of a settlement.
Strategy 2 – Gift or Sell Assets before Death
You may find that you save a lot of tax if you deal with your assets before death, rather than leaving them in your name to be distributed by your Will.
An example is assets held within a Self-Managed Superannuation Fund (SMSF) that are left to a non-dependent who may end up incurring a tax liability on the taxable component of the death benefit at a rate of 15% or 30% (plus the 2% Medicare Levy).
With proper estate planning, the money could be withdrawn in some circumstances before death tax free.
There could also be tax benefits in selling certain assets acquired before 20 September 1985 (pre-CGT) and distributing the proceeds before death without incurring capital gains tax.