Should you pass on your inheritance before you die? talkBIG podcast | Season 4 Episode 3

Andrew Sykes (00:03) 

The question of whether to pass on your wealth before you die is becoming increasingly relevant in Australia. Rising property prices, cost of living pressures and intergenerational wealth transfer trends mean families are rethinking traditional inheritance. But is gifting early a smart move or a risky move?  

Over the next 20 years, we estimate $3.5 trillion will be transferred from baby boomers to younger generations in what's being called the great Australian wealth transfer. This massive shift has prompted retirees to consider giving wealth away during their lifetimes to see beneficiaries benefit now. With such a massive shift on the horizon, families are asking, should we gift now or wait? What are the financial, legal and emotional implications? Hello, I'm Andrew Sykes. I've been a business accountant for over 30 years. I talk about business, money and the economy to help you get ahead. Welcome to talkBIG. In this episode, I think it's a really interesting topic, talking about that really sensitive and sometimes charged issue of when you hand wealth over. It's not just an emotional or a desire thing. There's obviously a lot of tax and financial implications. Today, I have two experts with me to help discuss this topic. One is Grace Bacon. Grace is a partner in RSM's Sydney office and has over 25 years’ experience in financial services and wealth management.

Her expertise lies in providing strategic, tailored financial solutions and wealth management. Grace has been a guest on this podcast before and welcome, Grace. Looking forward to having a chat.

Grace Bacon (01:46)

Thank you for having me again.

Andrew Sykes (01:47)

Thanks. And I'm joined by Taryn Ellerington, who is a principal at Russell Kennedy law firm and has been practicing law for over 17 years. She specialises in estate planning, probate and administration, succession law and estate dispute resolutions. She has a Master of Law and Legal Practice and a Bachelor of Commerce. So welcome to you, Taryn.

Taryn Ellerington (01:49)

Thank you for having me, Andrew. 

Andrew Sykes (02:11)

Yeah. And what a great topic. This is certainly something that you do read a lot about, hear a lot about. And, you know, it's not just financial. It's not one thing. We've got longer life expectancies. We've got a whole bunch of different factors that feeds into it. But why does it really matter now more than at any other time? What's driving that conversation?

Grace Bacon (02:34)

Well, I think from my perspective, what we've seen in the last two decades is the rise in property prices, as well as people living longer. The average life expectancy now is around 88 or 89 years of age. And also, with the substantial growth we've seen in the share markets as well, it means people are also having a large superannuation capital base later in life.

So that has really been driving the conversations coupled with the fact that younger families or children of the baby boomers are facing cost of living pressures, higher property prices, as well as education costs, which is actually prompting families to have conversations around, would mum and dad be better off providing some funds to the children earlier as opposed to waiting for when they pass away.

Andrew Sykes (03:25)

Yeah, and do you see, is this being seen as a way to fast forward financial security for adult children?

Grace Bacon (03:32)

Certainly is, I think a lot of concerns for retiree parents is that they're seeing their children not being able to get into the property market. That's always been a bit of a driver, you know, the great Australian dream of owning your own property, and then finding ways of trying to help their children to get into the property market. So that's one of the conversations in terms of helping them get into the market, but also as a way to provide some funds to the children while they're alive. 

Andrew Sykes (04:01)

Yeah, I do think that is a really good point. I think we all have our own personal experiences. I'll be open with mine. I've told my children not to expect an inheritance. They take enough now and I give them plenty. I think there is a really good point in seeing your children enjoy that wealth now. But it doesn't come without risks. Taryn, what are you seeing in terms of risk and particularly with longevity of parents after they've given some of their inheritance to the children early.

Taryn Ellerington (04:28)

Look, absolutely. I think one of the biggest blind spots is people like Grace said, are underestimating their longevity. You know, people have to fund retirement not just for 10 or 15 years, it's more like 20 to 30 years. And the risk with early gifting is handing over control of an asset whereby it actually limits your ability to be independent. And for me, estate planning is all about helping people to age confidently and well. So, if we're going to do this, it has to be part of a broader estate plan. It has to be documented. You have to have conversations. You have to get advice from people like Grace and myself in terms of future disputes and mitigating the risk that can come with early gifting. And that's not to say it's not a good strategy but we have to make sure that it's not intersecting and compromising your client's independence in doing so. 

Andrew Sykes (05:20)

Yeah, so quite often and we'll look at some of the pros and cons because there's an argument for both sides of it. Grace, what are the main advantages of giving the wealth away before death?

Grace Bacon (05:31)

Well, I think it allows the gifter or usually mum and dad to direct or observe how the funds are going to be used and to make a difference to their loved ones. It also allows them to experience some joy with it rather than when they pass away, they really don't know what happens with the funds. So really having a bit more direction or influence on how the funds would be used. I think that's an advantage.  

But it's also, as parents, we never stop worrying about our kids even though Andrew you say you're not going to leave anything for your kids but I think you know naturally as parents we would never really we don't want to see our kids struggle more than we have so we want to be you know if there is an ability to help them then you know what I'm seeing with some of my more older clients is going well I'm gonna pass away soon sooner rather than later but I've also got a pot of wealth here I'd rather than help them now rather than wait five to ten years’ time.

Andrew Sykes (06:25)

Yeah, I very much agree with you. To clarify my estate plan, and I think everybody, doesn't matter what age, should plan for eventualities. In our mid-60s, my wife and I will give a part of what we've earned to our children, so younger adult children can use it while it advantages them. I'm hoping to live till 90. That means they'll be close to 70.

Grace Bacon (06:28)

It's probably a reality these days. I mean, if you're in your 50s, I'm in my 50s, we're likely to be living to our 90s because of medical advancements. We are a lot more conscious about a healthy lifestyle so you're finding clients are living longer. You're finding people in their 60s are likely to live to maybe even the average life expectancy would actually go up to 90 by that.

So, we do need to first of all look after ourselves, but equally when there are surplus funds, there might be some considerations of helping the children earlier rather than leaving it till the end when you're not around to be able to work out what happens with the funds. 

Andrew Sykes (07:24)

Yeah, so Taryn, can I ask you, with a strategy like that, what are some of the risks that people often overlook when gifting early?

Taryn Ellerington (07:32)

One of them is again loss of control.

So, I think people, you know, the gift or the act of generosity is amazing if you're in a situation that you can afford to do so. And part of that is really stress testing your future needs with somebody like Grace, because retirement, you know, or sorry, your needs at age 65 is very different to age, you know 85. So, loss of control. And as I said before, losing control means you're becoming more reliant on somebody else like a child.

Again, like Grace said, people are underestimating how long they'll live. And of course, I think the biggest thing is the human element is that people are underestimating the influence of time on circumstances. So the influence of time on family dynamics and relationships, you know, we're a family, we don't argue about money, but we're not going to account, you know, the entrance of third parties that have an effect and what that means when we hand over a gift, and what exposure that gift is then to that child's circumstances. And then we're talking about things like family law disputes, we're talking about risk creditors, we're talking about bankruptcy.

Andrew Sykes (08:39)

If we look at what you've just raised there, so relationship breakdown, how does relationship breakdown, in so, you know, take a situation where parents have given a substantial gift to one of their children, and then a year or two or 10 years later, there's a relationship breakdown. How is that gift treated?

Taryn Ellerington (09:01)

I've got to be careful here because I'm straying into family law territory. What will happen is that there is a requirement for full and frank financial disclosure when those parties go into those proceedings and everything has to be disclosed an inheritance, even if that inheritance is received by way of a testamentary trust. And the court has the ability to apportion a part of that in terms of the separation and division of assets.

Grace Bacon (09:10)

Yep.

Taryn Ellerington (09:28)

And it is not a fixed formula in terms of the family or court. So I think the issue is that gifting in a vacuum and on an ad hoc basis, while it is generous and it is probably one of the most meaningful things we can do, we have to be very careful that any risks surrounding that are mitigated and people are aware of the consequences when doing that.

Grace Bacon (09:32)

Yeah.

So one of the ways to mitigate some of that risk when it comes to family breakdown and you've received a substantial early inheritance or a gift is looking at setting up a binding financial agreement and making sure that those funds or the gift that you've received is segregated  because a binding financial agreement can be set up at any time in the relationship or post the event and so that a binding financial agreement is one of the ways that people can protect their gift to ensure that you know that is not coming into potentially the family law proceedings. Another way to protect the children is also as a substantial gift you can actually set up a loan arrangement so that it is actually a loan and then when Taryn's work comes into play with the estate planning side of things and it's about making sure that that loan is then a part of the will. So that is another way that we can protect that gift.

Andrew Sykes (10:46)

And that's really good tips. The time to do that is before there are any signs of relationship breakdown and arguably before the gift has been made, isn't it? You know, do that, then make the gift.

Grace Bacon (10:58)

It could be a condition of the gift that mum and dad stipulates of giving you this gift and having a frank family conversation to say, it is a gift, but we're going to set up a binding financial agreement to make sure that if there is a relationship breakdown down the track, these funds belong to my bloodline as opposed to otherwise.  being.

Andrew Sykes (11:17)

Yeah.

Taryn Ellerington (11:18)

I think the reality is that we really have to be proactive about this because when we are reacting it's normally in high stress situations and that is a very expensive exercise not just emotionally but financially so it really has to be structured and informed and not ad hoc because especially when it is given it crystallises and it's very hard to pull back.

Grace Bacon (11:21)

Yes.

Mm-hmm. 

Andrew Sykes (15:12)

Yeah, there's obviously a lot of tax and financial implications which are complex when you do this. So, Taryn, can I ask you, I've mentioned estate plan. How does early gifting interact with the estate plans, wills and future disputes?

Taryn Ellerington (15:23)

It has to be integral to the overall estate plan, 100%. I think the biggest issue that arises is when it's not part of the bigger estate plan and it's not communicated or documented, misconceptions or perceptions arise to dispute. It's often not the generosity of the gift itself, it's the understanding or maybe not knowing and people finding out later, but my sister got this gift and I had no idea. So, it has to be a conversation, and I always say my idea when I turn on my soapbox with estate planning, my idea is you know people go I'm getting married I need a will, I'm getting onto a plane to go to Hawaii I need a will. It has to form part of your life cycle and not just be triggered by certain events.

Andrew Sykes (16:00)

Hmm.

Taryn Ellerington (16:13)

So that's a conversation you have to have with your lawyer at the time to say, this is what I'm considering doing. Again, like I said, it has to be integral because if it's not, and it's not part of the bigger picture, it can cause expectations by certain beneficiaries. Yes, they can expect future gifts, or the siblings can kind of go, well, hold on, where is the equality of fairness in this?

Andrew Sykes (16:29)

Yeah, and.

So that's around holding the family meetings, the open discussion. This is my plan. This is what I want to do and making.

Taryn Ellerington (16:43)

Hold a family meeting. Sunday roast!

Grace Bacon (16:45)

Yeah.

Taryn Ellerington (16:46)

Get the family around!

Andrew Sykes (16:48)

So, when we look at that, we'll get onto family dynamics a bit more in a second, but legal structures. What can we do to reduce the risk of this?

Taryn Ellerington (16:57)

Documentation is key and I think if people can think about it from this perspective. So, the dispute arises on the person's death, the will maker’s death. The person with all the evidence as to why they've done what they've done is not able to step into the witness box. So how do we provide evidence of what was done and why it was done? Loan documents, even gifts should be documented. You can do a deed of gift.

Record notes or reasons about why you've done what you've done. A common strategy that we do is we don't air dirty laundry in wills because wills become public once they are probated. We get clients to do a statutory declaration explaining why they've done what they've done, and the executors of the estate can use that to their benefit if proceedings or disputes arise.

Andrew Sykes (17:34)

Hmm. Hmm.

Taryn Ellerington (17:48)

And the judge will take that into consideration when considering the outcome.

Andrew Sykes (17:54)

And there may be reasons, quite valid reasons, to favour one family member more than another. So, it's really around documenting that, isn't it? These are my reasons for what I've done.

Grace Bacon (18:03)

Yes.

Taryn Ellerington (18:03)

Yes.

And in the context of this, let's just say that fairness in the situation does not equate to equality. Like you said, there may be very good reasons why more provision is made for one child, but in the absence of reasons, that is like a red rag trouble. And they prompt someone to mount a claim. 

Andrew Sykes (18:21)

Yep.

Yeah. So, they do say that money can bring families together or drive them apart. So, Taryn, when you're talking to families, how do you manage those expectations and what are some of the most common conflicts that arise from early inheritance?

Taryn Ellerington (18:40)

And look, that's a very good point you used is managing expectations. And part of my role as a succession lawyer is actually to force clients to consider competing interests of their children and their beneficiaries. And it actually forms part of the will-making capacity test is going through anybody who's potentially a beneficiary or if there's a moral obligation to provide for that person and making them rigorously test why they're doing what they're doing.

Andrew Sykes (19:07)

Yeah, you did mention before a fair approach. What does a fair approach look like when children have very different needs?

Taryn Ellerington (19:16)

Well, the fair approach is just being transparent and clear and sharing why you've done what you've done. At end of the day, everybody has testamentary freedom to do what they choose to do. But like I said, gifting without that structure behind it is basically gambling. Just to put it simply.

Andrew Sykes (19:32)

Hmm, you're gambling on the outcomes that you're going to get.

Taryn Ellerington (19:35)

Exactly and basing that on your current circumstance and like we said that can change so we all wish we had a crystal ball that'd be amazing we don't know but it's also projecting and kind going well...

They're fine now, they're financially fine now, but what would it look like in the future? I mean, I have very frank conversations with my clients when we're about their children and I ask things like, do we have concerns about substance abuse issues? I.e. gambling, drinking, drugs? Can you foresee this person, you know, in 20 years being able to manage their own property and affairs? Or do we need to make sure that it's put into a trust, so it is protected in some way? So, it's having very real conversations and it can make clients feel uncomfortable but that is part of my job in terms of making sure that adequate provision is made for the beneficiaries.

Andrew Sykes (20:23)

Yeah, it's very difficult situation,

It's a very difficult situation, isn't it? As a parent, you can say, I need to look after one child more than the other. But it's also from a child's point of view, whether they're adults or not, it's them hearing, mum and dad love you more than they love me. So, there's always a lot of emotion involved, isn't it?

Grace Bacon (20:40)

Yes.

Taryn Ellerington (20:43)

100%.

Andrew Sykes (20:44)

Grace, how do you see this playing out with your clients when they're talking with you about it? How they differentiate between the needs of different children?

Grace Bacon (20:53)

Certainly do. I mean, there's also a timing factor too. I'll give you an example. If a couple has two children, for simplicity's sake, let's say two children, let's say 10 years ago they helped one child first and then they gave that child, say, $20,000. But now 10 years later, they want to give the second child the same amount of money. But that $20,000 10 years ago is not $20,000 today. So having to adjust that with CPI and because that $20,000 could have been invested into a property or into another asset, but $20,000 10 years ago and versus $20,000 today, you have to adjust that amount to make sure that it looks the same or is the same amount. So, because the second child might go, that's not fair because $20,000 10 years ago is not the same as today so I should be getting more.

That's the reality of conversations that children and the families would have about it. So, making sure that that's all documented and because you, unless you're giving the funds at the same time, but then that's not also practical because it depends on the age of the children at the time or the needs at the time, right? So yeah.

Andrew Sykes (21:52)

Hmm.

It's not an uncommon strategy to say when each child reaches a certain age, I'm going to give them 'X' amount. Certainly, and you don't even need to go back 10 years, go back before diesel was a and $10,000 or $20,000 meant a lot more. So, it's a really important point. I will emphasise or ask, you know, that having the open discussion seems to be the key thing, doesn't it? Talk to your family, sound them out, communicate with them what your ideas are, your plan. Now, do the two of you get any feedback from the gift recipients or it's really just from the givers?

Grace Bacon (22:48)

We certainly get, usually when I work with my clients around early gifting, I like to ensure that the whole family is involved in that discussion so that there are open and transparent discussions. And in my role, that is really playing the objective person and making sure that everyone is on the same page and understand what mum and dad's intentions are. So that everyone is receiving the same, this is the reason why mum is doing this for John versus what they're doing for Mary. So that is all very clear and transparent. 

Andrew Sykes (23:24)

Yeah. Thank you, both Grace and Taryn. It's been a really interesting conversation on what can be a very difficult but also rewarding area. So, giving away your inheritance early can't be done lightly. It requires careful planning, clear communication and strategic structuring to avoid financial pitfalls and importantly to avoid financial friction or even worse, unintended tax consequences.

But when you do it thoughtfully, can create a living legacy that you actually get to experience. If I could just ask in closing, what are the top three actions that listeners should take before they decide to give gifts early?

Taryn Ellerington (24:06)

Stress test your own future needs first and do it rigorously and vigorously. Definitely structure it and have it documented and get advice before and not after you have made that early gift.

Andrew Sykes (24:12)

Yep, they're great tips. Grace, anything you wanted to add to that?

Grace Bacon (24:27)

I think I echo what Taryn says, seek advice, make sure that you're having an open and frank family discussion before you do the gifts. Understand what the specific needs are for each of your gift recipients, because the gift that they receive or the form they receive in might be quite different depending on their needs. And ensuring that it is going to provide them with a meaningful change, financial change to their personal circumstances.

As opposed to them swindling it away, you know, going on a holiday versus putting it towards their longer-term future.

Andrew Sykes (25:01)

Yeah, excellent. I think both of you have really well summarized what our discussion has been today. And that's plan it, communicate and get assistance to make sure you're right. So, thank you both. We've explored the financial, legal, emotional risks of early inheritance. So, thank you for joining us on talkBIG. Remember, seek professional advice when considering your own financial security and also communicate openly with your family.

Thanks for joining us on talkBIG. If you found this episode helpful, subscribe and share it with your network. Thank you I'm your host again, Andrew Sykes here. Enjoy and see you next time on talkBIG.