Avoid the perils of gifting in retirement

Understandably, many people entering retire­ment are concerned about whether their savings will be adequate. It may take a few years to see whether they can live comfortably, and at this stage some are in a posi­tion to make gifts to the fami­ly or some worthwhile cause.

When considering gifts in retirement, goals usually fall into four main areas:

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1. Gifting money to children (or grandchildren) to help with, for example, education, pur­chasing a first home, or reduc­ing debt;

2. Transferring assets to chil­dren, such as a holiday house;

3. Making bequests or dona­tions now, rather than in a will; and

4. Reducing assets to qualify for a government pension.Approaches and considera­tions will vary depending on which of these is the main focus.

Gifting money to children or grandchildren

A surprising question often raised about giving money is whether the giver, or recipi­ent, is liable for tax on the gift. The short answer is ‘no’, as far as the giver is con­cerned. But if the recipient invests the gift received, they will be liable for tax on any income earned on the invest­ment.

For grandparents giving money to help pay for a grandchild’s later education, this can create tax problems, as minors are taxed at the highest rate.

Therefore, other options should be considered, for example, investing in a man­aged fund in the name of a low-income earning parent but earmarked for the child.

Another option is setting up a separate superannuation account in the grandparent’s name, as income will then be taxed at the 15 per cent super­annuation rate. This approach can also be used by parents, provided the money doesn’t need to be accessed before they reach retirement age.

There are other alternatives such as education funds, but the after-tax returns may not be as good as a managed fund held in a low-income earning parent’s name.

Transferring assets to children

While there is nothing to stop people transferring an asset, such as a holiday house, to family members for a nom­inal sum, stamp duty and cap­ital gains tax will still be cal­culated on its market value, so there will be an immediate tax charge to be borne either by the parents or the children.

Another approach is to bequeath the property in a will, as there will be no stamp duty payable, and capital gains tax (CGT) will be deferred until the property is sold, if at all.

When bequeathing property in a will, CGT issues must be considered.

As a general rule, CGT applies to investment proper­ties or holiday homes, but not the family home. However, a common pitfall is to leave the family home to one child, and a holiday home or investment property to another child, believing them to be of equal value. Unfortunately, the dif­ferent CGT treatment will have a significant impact on the recipient of the holiday or investment property. Even with the family home, there can be tax consequences. Take the example of two chil­dren who are jointly left the family home in a will and it becomes the main residence of one child. When the property is sold (unless the sale takes place within two years of the parent’s death), the child that lived in the property will not pay CGT, but the other will be taxed on their portion of the sale. This applies whether or not the sibling living in the property paid rent.

Making bequests or donations now rather than doing so in a will

Gifts given to one child dur­ing the parents’ lifetime, but not another, makes a will even more necessary to document intentions clearly.

For example, take a two-child family where the daugh­ter is given the equivalent of her inheritance early to help her over some financial difficulties. If there is no will that clearly directs the rest of the estate to the son, giving reasons, there could be problems for him if the daughter challenges the will.

Retirees who are concerned that they may not have enough capital to last their lifetime should leave any bequests to their will. For retirees that have annual income tax considera­tions, charitable donations in their lifetime can offer sizeable tax deductions that are lost with donations made in a will.

However, if they make a charitable donation in their life­time, their will should be then reviewed and, if necessary, amended to take such dona­tions into account.

There are several ways of making bequests or donations, including setting up a trust or a charitable foundation, which have different tax and financial implications.

Where there is sufficient cap­ital, setting up a permanent memorial in someone’s name through a foundation is often

appealing. Where capital is lim­ited, simpler ways of remem­bering a loved one include memorial benches, donations of books to a library, or a tro­phy to a sports club.

An additional benefit of tak­ing such action in retirement rather than through a will is the lifestyle benefit. Donors can get involved in the charitable cause they support, giving them an interest in retirement.

Reducing assets to qualify for government pensions

The additional benefits that come from having an age pen­sion, such as utilities or phar­maceutical allowances, encour­ages many retirees to consider giving away assets in the hope of reducing their asset base in order to qualify for the pension.

However, the rules on bequests and qualification for people on the age pension are quite clear and attempting any such arrangements will attract the attention of Centrelink.

Pensioners can make gifts of $10,000 a year but no more than $30,000 over five years, and effectively reduce their asset base. However, any gifts above these amounts are deemed to remain as assets in the hands of the donor for five years when calculating their government pension entitle­ments.

The good news is that the ‘assets held’ limit has been increased from July 1, 2008.

The new limits are shown in the table.

The rate of payment is cal­culated under both the income and assets tests, and the lowest result applies.

The new limits make it worthwhile for self-funded retirees to check the impact of equity and property market losses on their investable assets, as they may now qualify for a part-pension.

Michael Hutton is wealth management partner at accountants and business and financial advisers HLB Mann Judd Sydney.