This article was originally published in The Senior and is republished with permission.
New research has revealed the bank of mum and dad is forking out $140 billion dollars in early inheritance each year, as experts warn older Aussies to future-proof themselves from any family squabbles.
Sangram Rana, director of Melbourne financial services company Build My Wealth, said many parents are choosing to give money that would have otherwise been an inheritance to their children now, so they do not have to wait years or decades for the financial leg up.
"If the kids are suffering now, we can figure out a way to pass on the wealth early," Rana told The Senior.
The billions in spending comes as parents are increasingly handing over 'everyday inheritances' - an early release of inheritance money to pay for everyday costs. This could be school fees, holidays, insurance, cars and even phone bills, according to SBS' multi-year Booster Economy study.
But Rana it's only ideal to offer early inheritances when it can be done without compromising the parents' own livelihood.
"It's just finding the right balance, and sometimes the answer is they can't give anything now. Sometimes, when they have money, they can," he said.
Handing over larger sums often comes with risks and can lead to unintended consequences, including watching your hard-earned nest egg disappear.
Rana gave the example of lending $100,000 to your adult child for their home deposit. If that child then goes on to have a separation or divorce, they could potentially lose half, or all of the loan.
"In lots of cases there's too many variables at play," he said.
Any parent or grandparent thinking of handing large sums of money out to family should seek professional financial advice and consider entering into a written, or even formal, agreement.
"To protect against future disputes with your kids, it's good to have an agreement upfront," he said.
"Payments usually should state that this is a gift, or this is a loan, depending on what they want," he said.
He warned that in the case of giving a gift, it becomes almost impossible to recoup any amount that might be lost in a divorce.
Open conversations can help prevent future disputes over money
Having open conversations with adult children about money greatly reduces the likelihood of a dispute, according to Dr Zena Burgess, chief executive of the Australian Psychological Society.
"Studies suggest that parents who set clear limits or boundaries but explain their reasoning behind a decision and remain open to discussions can have better outcomes," she said.
"One of the most important factors in delivering a message is the delivery, not the actual message."
Burgess said any harm that comes from handing money to children often has more to do with the circumstances, rather than the dollar amount.
Anything given with family expectations or control will probably make an adult child feel guilty, she said.
Gifts given to help an adult child with their future and financial growth are more likely to create a positive experience for both parties.
Steps you can take to prevent family conflict
Five steps to giving an everyday inheritance to your kids without conflict
Involve children in financial meetings
- Bring them to sessions with financial advisors to build their financial literacy, helping them understand the effort required to build wealth and how to manage an inheritance.
Maintain open communication
- Speaking candidly about money fosters family harmony and prevents jealousy or disagreements between siblings.
Practice transparency with unequal support
- If providing financial assistance to one child, explain the arrangement to other siblings and clarify that they would receive similar support if in the same situation.
Set clear boundaries
- Communicate financial limits directly and once, avoiding repeated hinting or over-explaining.
Protect against financial abuse
- Keep lines of communication open among all family members to help spot potential financial exploitation from either a relative or an advisor.
Rana often encourages clients to bring their children along to financial meetings to help build their own financial literacy, he said.
"So that kids know the debt parents are taking on, or the effort they're undergoing to build their wealth," he said.
"This way they're learning, and when they get the [inheritance], they know what to do, rather than just hoping their kids will do well."
Burgess agreed that speaking openly with your children about money can help prevent arguments later, and can help prevent jealousy or disagreements if one sibling receives more than the other.
"Communicating clearly with our children, no matter their age can be the key to a healthy relationship," she said.
"Communicating limits or boundaries clearly and once, rather than hinting repeatedly or over-explaining, could be something to focus on."