Passing down the family assets – by gift or by will?

April 5, 2023

Many people come to a view that “giving it all away” or at least divesting themselves of considerable assets is a good strategy so they can reduce their aged care costs and access the pension or other government benefits.  For some that might be, but for most this strategy requires far more careful consideration to avoid a situation that might leave all parties worse off financially for minimal gain.

The background

As people start to look towards retirement, they start to consider the cost of aged care and the ability to access a pension to assist with funding their retirement.

It is at this point that parents might think about gifting assets to their children with the view of decreasing the value of their assets for various asset tests.

Giving it all away!

So, if you decide to gift most or all of your assets to your children during your lifetime what are the key issues that will impact those concerned?

• Duty consequences. The transfer of some assets will incur transfer duty. Depending on the asset and what it is used for, there may be the opportunity to take advantage of various duty exemptions. The ability to apply for an exemption is very much based on the facts of the proposed transfer.
• Tax consequences. Depending on when the asset was acquired, how the asset is held, what it is used for and the increase of the value of the asset since it was acquired there may be taxation consequences that will need to be considered. If the asset is used in the operation of a business, there may be tax concessions available. There might also be future taxation consequences for the recipient of the asset, such as an increase to their taxable income.
• Loss of security and control of the asset. Once transferred the parent/s no longer have that asset to rely on should their financial circumstances change.
• If the children are still relatively young you lose the flexibility of distributing assets which best fit with individual children once their career/life paths become clearer.
• The rules for pension payments and aged care access mean the transferred property will likely be considered an asset of the parents for five years after the gift has occurred.

The asset immediately becomes an asset of the child and vulnerable to events in that child’s life such as bankruptcy, death, personal struggles or relationship breakdowns.

Passing down under a will

Alternatively, you may hold onto your assets and pass them to your children under your will.  This strategy comes with some benefits which might help to off-set any financial gain (through access to the pension or reduced aged care costs) you may have realised had you transferred the asset in your life time such as:

• No transfer duty.
• No capital gains tax.
• Possibly providing a better tax outcome for your children if you use testamentary trusts in your wills.
• Flexibility for the children to work out an arrangement that suits them best at the time of death.
• Parents continue to own the asset and retain financial security including the opportunity to use income.
• The assets are not at risk of life events of the children including bankruptcy, relationship breakdowns, personal struggles or death.
• If both parents are currently alive a partial transfer to the children could occur when one parent dies. This two-step process may suit both parents and children.

A decision to divest yourself of assets during your lifetime needs careful consideration: firstly of what you are trying to achieve; and then the risks and benefits of implementing such a strategy.

If you would like advice around this issue please contact a member of our Estate Planning team.