It is no secret that the last few years have been a struggle for most of us. The economy has been incredibly poor, the worst it has been in years, and the recovery has been stale and slow. That being said, it has grown harder for the average family, middle class families included, to find innovative ways to make ends meet. Not only are costs rising in what seems to be every aspect of everyday living, but there simply isn’t the same amount of income coming in to the house. So, not only does more money need to be spent but there is also less money coming in to the house. For many families, the crunch was unavoidable and was due through no fault of their own. Many workers lost their job during the lull in the economy which caused a direct hit to the income coming in to their households each month. With less income, households were likely to find it even more difficult to live off of credit or to borrow necessary money. The result is that the average family, even those families that were quite comfortable only a couple of years ago, have found it incredibly difficult just to pay their mortgage and necessary utility bills. While the recovery is in effect, it never seems to move as quickly as we need.
Of course, the effects of a slow economy were felt by most consumers but not all. There were some households that were minimally affected by all of the changes in the financial world. These families may not have lost substantial income or were able to stay afloat by drawing down some of their savings. Regardless of the reason, there was a small proportion of us who did not feel the financial strain as the rest. For the families less affected, gifting away some of their financial stability, especially to their children has become a real consideration. Parents who are in better positions than their children have started to more seriously consider gifting cash to their children now as opposed to later in life or through an inheritance.
There are of course differing opinions when it comes to gifting cash early. For those who support the idea, it seems almost cruel to withhold cash from children who need it when in all likelihood they will receive it at some point anyway. So, it makes the most sense to give it to them when they need it most rather than withholding it until a more convenient or predetermined time.
While most of those parents wealthy enough to consider leaving their children inheritances agree that they want to leave something behind to their beneficiaries, many admit that they have either already provided financial support to their children or are currently providing support. So, leaving money to loved ones earlier than is to be expected is occurring more frequently than you might automatically assume. However, that doesn’t mean that it works for everyone or would work for you and your family. Even though the recession of 2008 did mean that fewer parents gave away early inheritances, that number is now increasing considerably. However, the ways in which parents and grandparents are helping their younger family members are becoming more unique. For example, it is becoming more common to pay for education and tuition expenses. It is also becoming more popular to pay for family trips or other big ticket items.
Even though early inheritances are growing in popularity, there are both advantages as well as disadvantages when it comes to providing financial support earlier in life. The first advantage is that you get to see the help you are giving to your children first hand. So, you are able to witness how you are helping them. This, of course, is impossible to do if you wait until your passing to leave an inheritance. From a more pragmatic perspective, there may be tax benefits to giving early as well. This applies mostly to those who are incredibly wealthy and will be leaving a very large inheritance. If you are very wealthy and do not give early, you can expect to be hit with an estate tax of 40%. By giving early, you can decrease your estate and therefore avoid the tax as much as possible.
For every advantage to early inheritances, there is a disadvantage. To start, you may end up finding out that you have gifted too much away and are now in need of help yourself. Before giving away any inheritances, it is strongly suggested that you ensure all of your expenses, including long term care costs, are covered in full. The next disadvantage is that your early gifting may cause tension within your family. The best way to avoid seeming like you are playing favourites is to bring your attorney directly into the conversation with your loved ones. This can ensure that your intentions, and the reasoning behind them, are clearly explained.
The biggest reason for gifting we are seeing currently is to assist children who are first time buyers to get onto the property ladder. Finding a deposit these days seems difficult for the younger generation with the expenses they incur. Therefore, using the equity in one’s property to assist them could give them the leg up they require and at the same time help them obtain a better mortgage deal than would have otherwise have been.
Inter-generational gifting can also come from not just the parents, but also the grandparents where a close family relationship still exists. These grandparents will usually be of retirement age and although finance is usually difficult to come by over 60-65 there are still avenues available. Equity release schemes have become the vehicle for many retirees to use as a means of raising tax-free cash by gifting to the children, or even the grandchildren to then pass on as they see fit to the next generation.
Equity release schemes also do not have to be taken on a roll-up lifetime mortgage basis which for some retirees can be overwhelming off-putting. Therefore, in such scenarios, the children or grandchildren could opt to repay some, or all of the interest charged by the equity release provider. In this way the balance is maintained throughout at its original level, appeasing both the borrowers & the children with peace of mind. These interest only lifetime mortgages have become more influential in practice for gifting purposes and should therefore be given close scrutiny after a full length discussion with an independent equity release adviser.