Real client story. Names and some details have been changed to protect our clients’ privacy. Figures were estimates at the time of advice and outcomes are not guaranteed. Every situation is different.
Alister and Catherine are in their early 60s, happily retired and proud grandparents. Their two adult children have families and mortgages of their own, and one of them runs a business. Like a lot of retirees we meet, they had reached the point where they would rather see their money help the family now, while the grandchildren are young, than wait for it to pass through their wills.
What held them back was a worry many parents share but few say out loud. What happens to that money if a marriage ends, or if the business gets into trouble? They had also watched friends step in to raise grandchildren after a family tragedy, and they had seen how heavy that load can be, emotionally and financially. They wanted to help. They also wanted the help to stay with their own children and grandchildren.
What we found
A straight cash gift would have reduced their children’s mortgages. It would also have left the money exposed. Once a gift is made it belongs to the child, and in a relationship breakdown or a business failure it can end up in a property settlement or in the hands of creditors.
We also noticed a gap that had nothing to do with the mortgages. Neither young family held the level of personal insurance we would want to see for parents with dependent children. If something happened to one of them, the financial weight could easily land back on Alister and Catherine.
What we did
Instead of a gift, we put formal private loan agreements in place, lending each child $100,000 to pay down their home loan. Each loan carries a small annual interest payment and no requirement to repay principal, which is enough to make it a genuine contract. Each agreement cost about $100 to document.
The benefit is control. If one of the children goes through a divorce, or if the business fails, Alister and Catherine can call the loan in. That is designed to help keep the money out of a family law settlement or a creditor’s reach, although how a loan is treated in any particular dispute depends on the circumstances and on proper legal documentation. When the time is right, they can forgive the loan and turn it into a gift. It may sound a little hard-nosed, but they worked for that money for a long time and want it to benefit their own family.
The second step dealt with the insurance gap. Alister and Catherine now fund a $1,000 non-concessional super contribution each year for each child and each child’s partner. That money is earmarked to pay premiums for life, disability or income protection cover held inside super, set up on level premiums.
There can be a useful extra here, with conditions. The government co-contribution is only paid on a personal after-tax contribution made by the fund member themselves. To qualify, the money would need to be gifted to the child or partner, who then makes the contribution. Even then it is income tested and capped at $500 a year, so not every family member will receive it. Where it is paid, it adds to the money available for cover.
The result
On the advice at the time, each family had $100,000 less mortgage debt and a meaningful layer of insurance behind them. Taking out level premium cover at a younger age may reduce long-term insurance costs compared with stepped premiums. The family’s money is better protected from former partners and creditors, and Alister and Catherine’s own retirement savings remain intact as a safety net.
Just as importantly, if the worst happened to one of their children, there would be insurance money to support the grandchildren’s education and day-to-day life. Alister and Catherine would still be there for them, but as grandparents first, rather than as the family’s only financial backstop.
What we took from it
We often find that the most generous thing parents can do is also the most careful. Helping adult children does not have to mean handing over money and hoping for the best. A well-documented loan can give the same practical help while keeping a door open if life takes a bad turn. And sometimes funding a modest insurance premium does more to protect the whole family than a much larger cash gift ever could.
If any part of this story sounds familiar, book a free 15-minute chat and we can talk it through. You can also read more client stories.
General advice only. This story describes advice given to particular clients at a particular time. It does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and read our Financial Services Guide before acting.
Wealth Effect Group (CAR 424768) and Andre Dirckze (AR 395157) are Authorised Representatives of Boston Reed Pty Ltd, ABN 89 091 004 885, AFSL 225738.