By Liam Shorte
Sometimes it pays to think outside the square when wondering how you can help your adult children and at the same time protect your own enjoyment of your retirement. I’ll use a case study to explain this further.
Sam & Penny are 63 year-old retirees with two adult children. Both children have their own families and one also owns his own business. Sam & Penny wanted to give their children’s finances a boost now while they had young children and needed help rather than on their death.
Although Sam & Penny were keen to help out their children, they also wanted to keep the money in the immediate family (protected from in-laws and creditors).
In addition, they wanted to make sure their grandchildren were protected financially in case something happened to their parents.
They had seen friends having to take over raising grandchildren after a death of a child and saw the health, social and financial effects that had on their retirement so they wanted to put some protection in place.
We facilitated private loan agreements giving each of their children $100,000 to use towards reducing their mortgage debt. The loan required a minimal amount of interest to be paid yearly and no principal but it was enough to confirm a valid contract was in place. It cost $100 for each completely valid loan agreement
Importantly, if one of their children splits up from their spouse or their son’s business goes under, Sam & Penny can call in that loan, protecting their money from any family settlement and/or creditors. They can then later re-gift the children back the money when appropriate. I know this sounds harsh but they worked hard for their money and want to see it benefit their own children.
Sam & Penny also set up an annual $1,000 super contribution (Non-concessional) for each of their children, and their spouses, on the condition that it’s used to fund life, disability or income protection insurance. The added benefit is that they families also got some additional funds from the Government Co-Contribution which enabled better cover to be purchased on level premiums.
These contributions ensure that Sam & Penny’s grandchildren are financially set up if something happens to their parents. This strategy also protects Sam & Penny’s nest egg, because their grandchildren won’t need their financial support if the worst happens.
They are perfectly happy to step in if needed to care for their grandchildren but they have seen what the added financial worries did to their friend’s health and want to ensure they don’t suffer likewise.
There are ways to pass money to your adult children while protecting it from loss in the event of relationship breakdown.
Sometimes offering funds to insure your children is a far more cost effective way of coping with tragedies protecting everyone’s financial future.
Liam Shorte is Principal of Verante Financial Planning in the Hills and Hawkesbury Districts of Sydney.
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