As parents and children age, familiar family roles often switch, which can mean children supporting their parents financially. From providing housing to navigating government benefits, there are numerous ways that adult children typically assist their ageing parents. However, there are various factors that need to be taken into consideration based around each individual’s circumstances. These include ensuring that social security benefits are not affected, and protecting against adverse superannuation and estate planning impacts.
Financial assistance to parents increasing
While many Baby boomers benefited from the rise in the housing market across Australian metropolitan markets, not all in the cohort were that lucky.
At the end of 2015, an estimated 10% of households expected to have an uncomfortable retirement and fretted that they “won’t be able to pay for essentials”, while a further 26% will “only be able to afford essentials with no money left over”, according to ME Bank’s December 2015 ninth Housing financial comfort report (see Figure 1).
The report also stated that of the top four worries nominated by households, 30% of respondents said their greatest concern was whether they would have the ability to maintain their lifestyle in retirement.
Figure 1: Expected adequacy of income in retirement
Source: ME Bank Housing financial comfort report, December 2015
Strategy One’s private client adviser Duncan Derrington observed that the need for adult children to financially assist their parents is growing.
“We’ve definitely seen an increase in financial advice clients wanting and needing to provide financial assistance to their parents,” he said.
Common reasons for parents needing financial assistance
In modern society, there are a variety of reasons for parents needing financial assistance in retirement, and for their adult children’s willingness to provide such help.
- Increasing life expectancy
- Cultural obligation
- Limited superannuation
- Rising legislated Age Pension age
- Family breakdown
- Single-parent households
- Familial obligation.
Increasing life expectancy
A male aged 65 can expect to live 19.22 more years. For a female of the same age, it is 22.05 years. According to Derrington, this increase in the life expectancy of Australians has had an impact on the estimated savings needed to live a comfortable retirement.
“Increasing life expectancy results in increased cost in terms of funding aged care. It is a huge area that we’re starting to see in terms of parents getting to the stage where they need to fund aged care, and perhaps not having the means to do so,” he said.
“That’s a pretty common scenario that we see across our books, but there may also be cultural or religious reasons that they want to give that assistance.”
It is common for adult children of migrant families to provide financial support to their parents. Palmer Legal’s partner Melanie Palmer noted that the reasons are generally based around cultural obligation or simple need.
“You usually have families who have moved to Australia recently, have elderly parents come with them, they don’t speak English, they may be elderly themselves, and they might not have any skills that can be used or are viable for working,” she said.
“In those circumstances, you often see children or at least one child providing financial support to the parents.”
Did you know?
The provision of old-age support for parents is customary throughout Asia, particularly China, and has only recently become more common in Australia. From the perspective of the traditional Chinese family, it is considered the ideal realisation of filial piety.
Providing care for ageing parents at the end of life is regarded as of greater importance than that of ensuring parental well being when parents are healthy and alive.
The growing population of Chinese Australians provides opportunities for advisers to pay attention to these cultural differences and apply that knowledge to the benefit of their current and potential client base.
The latest figures, released in September 2015, from the Australian Bureau of Statistics, revealed the median 2013/14 superannuation balances for people aged 55 to 64 were just $150,000 for males and $80,000 for females.
ASFA’s chief executive officer Pauline Vamos reiterated the problem of superannuation inadequacy.
“In order to achieve a comfortable standard of living in retirement, an individual requires a minimum of around $545, 000 and a couple around $645, 000,” she said.
Compulsory employer superannuation in Australia began in 1992, with the introduction of the Superannuation Guarantee, resulting in many current retirees having limited superannuation balances.
Rising legislated Age Pension age
The age at which a retiree can access the Age Pension continues to climb. The current qualification age for the Age Pension is 65 years, however, the qualifying age will begin to rise from 1 July 2017 — in six-month increments every two years — increasing to 67 years by 1 July 2023. It has also been proposed to increase the qualifying age further — to 70 years between 1 July 2025 and 2035 — using the same measure.
Palmer believed that these changes will likely result in a gap between retirement and when people can obtain assistance from the Federal Government (Government).
“You’re going to see children lending financial support to parents more often because there’s going to be this gap where they can’t work to support themselves but are also unable to claim social security benefits from the Government,” she said.
According to Palmer, the Baby Boomer generation was the first to experience, on a significant level, the phenomenon of marriages ending when children leave home.
“This has a big impact, particularly on the mothers in that relationship who often have been staying at home and, therefore, might not have as much superannuation as the father in the relationship,” she said.
“You do see the children giving quite a lot of support, in that regard, just to one parent rather than the other.”
A common scenario with parents is that the husband predeceases the wife based on life expectancy, so it is common that the mother is the last surviving spouse.
Palmer highlighted that a parent who has chosen or been placed in the situation of raising children alone presents another scenario.
“There are various families that are single-parent families and have been limited in job choice due to childcare responsibilities, which also results in limited superannuation at retirement,” she said.
Palmer noted adult children who feel a familial obligation towards their parents are more likely to provide financial assistance. In other words, paying back what was given to them.
“The obligation of children who, for instance, had their mortgage guaranteed by their parents when they were starting out, all of a sudden they seem to think that they should be helping mum and dad because they helped me out,” she said.
Financial assistance comes in many forms
Derrington noted that the more common forms of financial assistance provided to parents, such as funding aged care, are subject to variation.
“It might be as simple as superannuation contributions for a parent, buying assets to produce income for a parent, or even right up to purchasing a home for the parent to live in,” he said.
Palmer agreed that, apart from paying bills, the most common form of monetary support to parents is providing accommodation.
“It can be in the form of the child buying a property, which the parents live in full time, or the child will pay the rent for their parents’ place of residence,” she said.
Contributions to superannuation
Making contributions to superannuation requires compliance with contribution rules that change as the age of the person increases. If parents are not over 75 years of age and meet the work test criteria, superannuation can be a tax-effective option for children to provide financial assistance to their parents.
When the parents are between 70 and 74 years and they satisfy the work test, contributions can only be made by the parent themselves, not by someone else. Money could be given to the parents to enable them to make the contribution, but the money could not be directly contributed on their behalf by a child.
Palmer explained that in order to benefit from concessional contributions, the parent needs to be a current member of the workforce and meet certain criteria.
“If you are still working, there are obviously the thresholds that need to be satisfied and not exceeded for the tax benefits to still be accommodated to lump sum payments,” she said.
“It’s essentially how much has been contributed already, how much is going to be contributed in addition, and whether or not the parent is able to still make tax-deductable contributions to their superannuation. This depends on what year you’re making the payments because the thresholds change every year.”
Once contributions are made, there is also the importance of considering how and when the benefits can be accessed.
Derrington added that although unrestricted non-preserved benefits can be cashed at any time, some conditions of release restrict the form of the benefit — lump sum or pension — or amount of benefit that can be paid, known as “cashing restrictions”.
“It’s worth bearing in mind that for them to access the money in super, which the child may have gifted to them, parents need to satisfy a condition of release to be able to have access to those funds,” he said.
The most common conditions of release for paying benefits include:
- Reaching the preservation age and retiring
- Reaching the preservation age and beginning a transition-to-retirement income stream
- Reaching age 65 (even without retiring)
There are two major factors that need to be weighed-up in respect of these conditions, including:
- The child will lose control over the money once it has been placed into the parent’s superannuation account — the parents then have the power to nominate where the money goes on their death, and
- If the parents in question are over age 65 or have started an income stream with the superannuation balance, the contribution will be counted in terms of the income and assets tests and affects their Age Pension.
Structuring ownership of assets purchased for parents
Palmer emphasised by way of the following example that when it comes to the best structure for the ownership of assets purchased for any parent, it is vital to consider each family’s individual circumstances.
“If there are a number of children, but only one child is going to be buying the home where the parents are going to be living, I would suggest that the child be the owner of the property for legal purposes,” she said.
“You want to avoid the problem of when the parents’ pass away, the estate being redistributed and that particular asset being split up amongst siblings — for which some of them might not have financially contributed.
“The catch, however, is it will be a potential land tax or capital gain tax problem for the child because it’s not going to be their principal place of residence.”
Palmer added that the ownership structure is also very dependent on the actions of the child, particularly in the case of the provision of property.
“If they’re just giving a gift and not expecting it to come back to them when the parent passes away or for it to be repaid, then it can go into the parent’s name,” she said.
“However, if the child is giving the gift with the expectation of it coming back when the parents either decide to move or pass away, then I would really advocate for it to be in the child’s name, and the parents be allowed to live there.”
The key purpose of the social security system in Australia is to provide individuals with a “minimum adequate standard of living”, according to the Treasury’s Australia’s Future Tax System: Final Report (2010).
The chief monetary transfers made by the Government include income support payments and payment to families, such as the Age Pension. An individual’s need for support is measured by the pension assets and income tests.
Derrington emphasised that these benefit assessment tests can be affected when a child provides financial support to their parent through the process of gifting.
“The legislation specifically excludes gifts from children or other immediate family members being included as pension income. However, those gifts will be assessed by certain benefit assessments, such as the income and asset tests,” he said.
What is a gift?
The definition of a “gift” is also important in the context of the child’s social security eligibility when they provide financial assistance to an elderly parent, or indeed to anyone. In other words, the gift may be counted in the parent’s and the child’s social security assets for the purpose of the assets test.
Gifting rules apply to any assets gifted in the five years before a person receives the Age Pension. A cap of $10,000 per year or $30,000 over five years applies for both singles and couples. Any gifted amount that exceeds the caps will be assessed as a “deprived asset” for five years after the date the gift was made. That is, any excess will be added back to the gifting party’s assets and assessed under the assets test.
Palmer explained that children should be conscious of how Centrelink will define assistance to their parents.
“If a child is simply helping mum and dad out by paying the electricity bill every now and then, it would be very difficult to allege at a later stage that this was a loan — that is going to be the nature of a gift,” she said.
“Other gifts, such as lump-sum money — depending on what the discussions were at the time the money was given — are likely to be classified as a gift, unless there’s some sort of loan document to say that it is a loan and that the child will be repaid.”
Palmer provided the following example regarding gifting and how it can potentially affect a parent’s Age Pension.
“A child gives their parent a lump sum of $20,000 and they put it in their bank. When the parent is undergoing the income and asset tests, for the purpose of Centrelink, that $20,000 is considered an asset and therefore is not exempt and will form part of the income and assets tests,” she said.
“Depending on where the particular parent sits, it may tip them over the threshold when being assessed for the pension, which means they’re no longer eligible for social security.
According to Derrington, it is very important that financial gifts provided by clients to their parents are included in the client’s plan.
“One of the areas where financial advisers can assist in that is quantifying that trade-off between the client’s own goals in terms of securing their financial future and the goal of being able to assist their parents,” he said.
“It’s very important that that’s quantified and the clients understand the ramifications for their own plan.
“There may also be a role for the adviser to be able to provide assistance to the client’s parent’s financial situation, so that the situation is considered as a whole rather than with client and parent being separate.”
Another factor that could potentially affect parents receiving the Age Pension is the way in which they structure the ownership of their accommodation.
Ownership structure of parental accommodation
Derrington noted that in the case of a home or other accommodation purchased for parental use, the ownership structure can affect Centrelink’s assessment of the asset, and is generally dependent on who owns the accommodation and who lives in it.
“If a client purchases a home and lets their parents stay in that home rent free, the value is not counted under an assets or an income test, and the parents will be assessed as non-homeowners,” he said.
“The parents cannot be considered homeowners unless they’ve got a legal right to the property.”
Palmer highlighted that if the parents are the legal owners of a property and it is their principle place of residence, then it is currently exempt under the income and asset tests.
“It’s only if they’re not living there that a problem arises because it would be classed as a non-principal place of residence and considered as an asset,” she said.
Estate planning considerations
Documentation is particularly essential when it comes to estate planning. If a child has given a loan to a parent, and part of the repayment is to come from the estate — before it is distributed — Palmer highlighted this should be reflected in the Will.
“It’s important at the time that there also be an independent loan document that the parent and the child have signed,” she said.
“You don’t want to be faced with a problem where there are other siblings who might not have been aware of this loan. They get caught unawares when the parent passes away and then all of a sudden the Will is being contested and this loan repayment is being thrown up in the air.”
Palmer provided an example where problems arose after a child lent money to their mother with the verbal arrangement that the loan be repaid from the estate, of which the lender and his sister were sole beneficiaries, after the mother’s death.
This example underscored the importance of acquiring both an independent loan document and an updated Will.
“Drafting the Will was quite complicated and it’s not clear whether or not it necessarily will stand up,” she said.
“At the time, the loan was made from one sibling to the mother and was to be repaid out of shares of the future estate. Unfortunately, they didn’t have any loan documentation at the time, so it’s all been done retrospectively, which is a large problem.”
Palmer added that a second problem with this type of arrangement is that it is uncertain what the estate will be worth at the time of the mother’s death.
“At present we’re working on the estate being worth x amount, but people are living longer. People’s cash assets will be diminished,” she said.
“While I don’t think property prices will diminish, clients may need to sell the family home so that the mother can go into aged care [for instance], which will further diminish the value of the asset pool.
“I don’t particularly like this type of undocumented arrangement because I think it does leave the child [who lends to the parent] exposed.”
Documentation is vital
The child providing financial assistance to a parent should always ensure that the loan is secured. Palmer explained that when providing a large sum of money to another party, regardless of the situation, it should be treated like any other commercial transaction.
“It’s common and understandable for children providing financial assistance to their parents to expect that the financial assistance they’ve provided will be considered in the parent’s estate,” she said.
“Families being what families are, estates can often bring out the worst in siblings. To avoid potential conflicts, its best that both the parent and the child have independent legal advice as to the ramifications of that — that there’s a formal documented agreement as to how that financial assistance is dealt with in the estate of the parent.”
Palmer highlighted that problems generally arise in these matters when people do not know what the boundaries, rules, and obligations are in relation to a loan agreement.
“If everything’s written down and everybody understands from the beginning how it works, it’s very rare you actually end up with a problem at a later stage,” she said.
“It’s when it’s all done on a handshake with a, ‘Don’t worry about it, it’ll be fine’, that you get the problems because life changes, situations change and you don’t know what the future is going to hold.
“When there are family dynamics and emotion involved, at the end of the day, if you don’t treat it like a commercial transaction, you’re setting yourself up to potentially forgo all that money at some point.”
Circumstances that could halt financial support
The two most common occurrences with the potential to endanger the continuance of financial support to a parent include:
- The child predeceasing the parent
- Changes to the familial situation.
Ramifications of child predeceasing parent
Derrington highlighted three key areas that need to be considered by the child with regard to their estate planning when they have provided financial assistance to a parent.
“The first one is to make sure that in the unfortunate circumstance where the child predeceases the parent who they’re financially assisting, that there be a provision in the Will for the assistance to continue, if that’s their wish,” he said.
“Flowing on from that, there needs to be funding in their estate to make sure that the estate is in a position to be able to continue that assistance, which may involve reassessing their insurances to guarantee that there will be funding in the estate.
“The third area that needs to be considered is whether the financial assistance that they’ve been providing to their parents makes the parent a current financial dependent under the Will, and whether that changes the estate planning documentation that they’ve put in place.”
According to Palmer, depending on the nature of the support — say providing the parent with $1, 000 per month — if there is not documentation to support that arrangement, such support will wane.
She added that a ramification for the child’s estate should early death occur is if the parent was due to repay a loan out of their estate to the “deceased” child when they die.
“The risk to the child in that instance is that the loan never gets repaid to the estate, particularly if there is no loan document supporting this repayment,” she said.
“The debt owed to the estate might go up in ashes as they say because nobody knows about it or it’s not reflected in anybody’s will, be it the child’s or the parents’.”
Changes to familial situation
Derrington outlined that two key areas likely to impact a client are changes in financial and domestic situations.
“Let’s say the child’s financial situation changes. The obvious flow-on from that — loss of job or even the child’s partner losing their job and reducing the household income — may lead to a situation where the client or the child is no longer financially able to assist the parent,” he said.
“The second is a change in domestic situation, such as a marriage breakdown for your client; a new partner …. Maybe it’s now more difficult for them within the terms of their own relationship to be assisting the parent — the new partner’s parents may also need assistance.”
Palmer elaborated on other issues that could arise in the case of a marriage breakdown or remarriage that may affect a parent’s financial support.
“They may need to be paying spousal support and/or childcare to their ex-spouse, which then diminishes the cash that they have in hand to provide the support,” she said.
“When people get married, if there’s been this arrangement and particularly if that spouse for instance doesn’t get along with the in-laws, you then do see this friction.
“If there’s no agreement in writing — that there is going to be the support provided — it is at the discretion of the child to continue giving this money, which puts the parent at quite great risk if that is what they’re surviving on.”
“Financial cost” of non-financial support
Derrington emphasised that a child exerting a lot of their time is a large part of the financial cost of non-financial support, which can lead to support being wound back or stopped completely.
“It takes time to get involved with supporting a parent when it’s more than just financial assistance,” he said.
“We’ve seen situations where clients in their 50s that may be supporting, financially or otherwise, their parents have had to reduce work hours to be able to be in a position to provide that assistance. This has obvious financial implications for the client.”
Increasing life expectancy, cultural obligations, inadequate retirement savings and a rising pension age are but a few reasons why an increasing number of Australian parents need financial support from their adult children.
While social security helps alleviate some financial stress, this is expected to reduce as the ageing population places greater stress on the welfare system. The gap between retirement and an individual’s pension eligibility is also increasing.
It is important to recognise that these circumstances create a potential trade-off between the child’s own personal finances and family’s welfare and their parent’s living standards.
Contact us to discuss a plan that suits your personal situation.