INTERGENERATIONAL FINANCIAL PLANNING
Contents
INTRODUCTION

 

As the name suggests, intergenerational financial planning (‘IFP’) aims to treat a family as what it usually really is – a single vertically-integrated economic unit. Most people think across the generations when it comes to their wealth management – and so advisers should too.

 

This is particularly the case when it comes to homes. Homes account for 43% of Australian household wealth. What’s more, around 70% of Australians live in a home they own themselves (with or without a mortgage). Put simply, homes are critical to the financial aspirations of most people.

We see all of our clients as potential candidates for IFP. We always spend a little extra time with all of our clients, during which we find out a bit more about the person, their life views and their relationships with friends and family. The purpose is not completely social. Often the extra time reveals important facts, hopes and attitudes that can then be blended into our advice and strategies, making them better than ever.

 

This ebook discusses one of the critical elements in IFP: housing and how best to manage it. Given the current crisis in housing affordability, we think this is a great time to discuss how family homes should be managed when thinking about the transfer of wealth across the generations.

We explore three particular aspects of the family home – how to manage it upon retirement, how to help other adults (be they your adult children or your parents) purchase their own and how to manage a home upon entry into the aged care system

 

THE FAMILY HOME AND RETIREMENT PLANNING


One of the key benefits of a family home is that its value is exempt from calculations used to determine Centrelink aged pension benefits. In addition, if and when an owner needs to move into an aged care facility, only a portion of the family home is counted in the assets test used to calculate the means-tested components of the accommodation and care costs.

This is often a good reason for older people to retain the family home, even beyond the point when they move into aged care. Please read this article to learn more about this.

INHERITANCES

 

In December 2014, the Grattan Institute published ‘The Wealth of Generations.’ The research paper can be viewed here.  The report contains some very significant findings, including the observation that the wealth of Australians aged between 65 and 74 increased by an average of $200,000 in the eight years to 2014. The wealth of Australians aged between 25 and 34 decreased on average over the same period. This increase was entirely due to the fact that older Australians were more likely to own homes, and more likely to own those homes outright, then their younger counterparts.

Amongst other things, this tells us that there is about to be a very significant transfer of wealth from older Australians to their younger children and grandchildren.

ESTATE PLANNING AND THE FAMILY HOME

The first thing to note is that not all family homes are included in a deceased’s estate. The entity that is ‘the family’ is not a legal person. Therefore, ‘the family’ cannot own an asset. Instead, individual members of a family own the home under some form of co-ownership. By far the most common such form is ‘joint tenancy.’ Joint tenancy is subject to the principle of survivorship, whereby the remaining joint tenants automatically acquire a deceased person’s share of a property upon death. There is nothing left to the estate of the deceased. It is only when there is one surviving owner, at which point the property ceases to be a joint tenancy, that estate planning for the property becomes an issue.

Where a couple own a home as joint tenants, the home will eventually form part of the estate of the second member of the couple to die. This means that most wills for home-owning couples will still contemplate the family home as an asset, if only in the event that the willmaker is predeceased by their partner.

The main alternative to joint tenancy is for two or more people to own a home as tenants in common. The following video details the differences between joint tenancy and tenancy in common:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAPITAL GAINS TAX

 

Provided that the home was the principal place of residence for deceased person, there is no CGT payable upon the transfer of a property following death. This is the case whether title to the property is transferred to the deceased’s beneficiaries or is sold to a third party.

 

If a person moves out of a property, the principal place of residence exemption extends either indefinitely or for 6 years after a person vacates a property, provided that they do not claim any other property as the principal place of residence during that period. If a person vacates a property and rents it out, they can continue to claim the exemption for six years. If a person moves out of a property and does not rent it out, (perhaps allowing family or friends to live in it rent-free while the owner lives elsewhere) the CGT exemption remains indefinitely – provided again that only one property can be claimed as the principal place of residence at any time. This second case can be especially significant if the property owner is elderly and needs to live in the care of relatives or friends.

TARGETING THE INHERITANCE

 

Sometimes, clients will seek to target particular assets to particular beneficiaries in their will. A common example is where there is an adult child who is disabled and continues to live with their parents into adulthood. In these cases, many parents leave the home to that child, and leave other assets (such as investment assets) to their other beneficiaries.

WHAT TO DO WITH THE INHERTIANCE?

 

Once a home has become the subject of a will, ultimately it can be either sold or kept. If kept, it can be used either as a place for one or more of the beneficiaries to live. Alternatively, it can be held as an investment. If it is lived in by a beneficiary, then it may become their principal place of residence, in which case it will retain its CGT exempt status into the future.

If the family home is a representative residential property (by which we mean it is likely to achieve the average rate of return for residential property) then retaining it as an investment is often a good financial move. The twenty-year average return on residential Australian property to 31 December 2015 was 10.5%. This return slightly exceeded that for Australian equities over the same period.

Whether a home is kept often depends on the number of beneficiaries who are to share it. As would be expected, where multiple beneficiaries are entitled to a share of the property, it is typically harder to keep the property. The beneficiaries would need to agree to become co-owners, which would in turn require that they each have similar personal financial situations.

Keeping the home is more common where there are fewer beneficiaries. If there is only one beneficiary, then he or she simply makes up their own mind as to whether to keep the property. Where there a few beneficiaries, they may decide to own the property as co-owners. Or, one common alternative is for one beneficiary to ‘buy out’ one or more of the other beneficiaries. This is discussed in this article by Di Rosa Lawyers, in Adelaide.

TIMING THE INHERITANCE

 

Most inheritances are received relatively late in the recipient’s life. The report by the Grattan Institute includes the following graphs:

 

 

 

 

 

 

 

 

 

 

 

What the graphs show is that a person’s prospects of receiving an inheritance peak in that person’s 50s and 60s. What’s more, if the inheritance is delayed until later in life, it is larger. That is, the relatively few younger people who receive an inheritance receive smaller inheritances. This is simply because most people inherit from their parents. This happens relatively late in the inheritors’ life as their parents live into their 80s and 90s.

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