Is the bank of mum and dad taking on more than its share?
Parents need to be cautious about supporting adult children financially
The expectation for an adult child to take care of their parents financially in their old age is not unrealistic. But, nowadays, it’s taking much longer for adults to become financially independent.
First there’s college for an undergraduate degree, then maybe a year or two spent travelling Down Under, then a master’s, then a couple of years in low-paid (if even) internships.
Even those who seek out careers earlier may struggle to secure their own home and cover a mortgage and childcare costs, given the recent restrictions on mortgage lending. Enter the bank of mum and dad, which may be needed even more in the years to come, as stringent lending requirements and elevated rents make it buying a home more difficult.
Parents who have spare funds, therefore, are likely to be more focused on “giving while living”, as opposed to their children carving up their estate when they die.
Typically financial advice in Ireland tends to focus on how your offspring can inherit your assets tax efficiently (and we have looked at that too, in the panel opposite). But perhaps a more pertinent question is should you be supporting your adult children at all?
Could parents, particularly those who have retired, be putting their own financial security at risk by helping their children? And could they also be storing up relationship problems for the future?
A survey last week by Standard Life, for example, found that almost two-thirds of parents want to help their children to buy their first home.
Financial adviser John Lowe says when it comes to adult children, there’s a “fine line” between supporting adult children who may still be in third-level education and those who have started their careers.
Many simply will not be in a position to do so, says Lowe, who points to a “huge overhang of debt” from the days of the Celtic Tiger, which means many parents are unable, even if they wanted to, to give money to their children.
If you take the example of a €400,000 three-bed semi-detached house in Dublin, a deposit of €80,000 would be needed to secure it.
“And I don’t think there’s many parents out there who’ll give that much,” says Lowe.
When Lowe’s 91-year-old mother died, she did so believing that she’d leave her unencumbered house to her children, but the cost of her care left substantial bills.
“You’re going to need every penny to have quality of life in your twilight years, so I’d be very loathe to give away money you might need,” he says.
Beryl Power, tax director with PwC, agrees. “One of the biggest pitfalls that people can fall into is to not retain sufficient assets for their own lifetime.
“People are living longer, so there is a greater need for cash there to fund healthcare and medical expenses into the future.”
An everyday occurrence during the boom, parents are today rightly taking a far more circumspect approach when asked to act as a guarantor on a loan.
While it might appear to make good sense at first glance – after all, it doesn’t require you to actually come up with any cash – guaranteeing a loan can land you in serious hot water if circumstances should change.
In his time advising people who are in serious debt problems, David Hall, cofounder of the Irish Mortgage Holders Organisation, has seen plenty of problems caused by parents acting as guarantor.
“It’s not one or two or three; it’s dozens if not over a hundred,” says Hall, noting that financial difficulties put great stress on relationships.
“It absolutely destroys relationships. I’ve seen family members not speaking; in one case a grandmother hasn’t seen her grandkids in two years,” he says. Relationships with other siblings can also be fraught if they perceive their inheritance to be at risk as a result of a parent running into trouble, he says.
“It should not be entered into lightly, but with extreme caution,” says Hall, and he advises that parents should get legal advice before opting for such an arrangement.
“Many, many parents think they’re doing the right thing to act as a guarantor. Some people think they just fill out a form, but they don’t realise that they’re on the hook for the full amount,” he says.
Confusion can also arise where a parent believes by buying a home with their son or daughter, they’re on the hook for half of the mortgage. “But they’re on the hook for the entire lot,” warns Hall.
“The person who has everything to lose is the parent. There’s a big difference between giving money towards a deposit and going guarantor.”
Problems can arise if the child falls behind on their mortgage payments.
If the property is in negative equity, the issues are then compounded, as it may not be a case of simply selling the home.
But if the property has a guarantor – someone who is likely to own their own home outright and may have other significant assets – this person will then become the main target of the bank.
“They can put a judgment on the [parent’s] house or go after their cash if available,” says Hall.
From a bank’s perspective, it’s a very simple philosophy, he says. “If you’re offering someone more targets, they’re gong to take it. It’s extra security for the bank,” he says, adding that in years gone by, it was “way too easy” to go as guarantor to a loan.
Elderly financial abuse is a concern of Age Action, and it has joined forces with Ulster Bank in conducting a survey to try to identify the scale of the problem in Ireland.
According to spokesman Justin Moran, the charity gets calls on the issue from two cohorts: from older people who are worried or stressed about being asked for money by adult children; and from siblings of adult children who have been given money by the parents and the sibling is concerned the parent was put under pressure to give it.
“It’s something we would be concerned about,” he says.
Sometimes pressure can be overt – “give me the money or else I’ll lose my house” – or it can be tied to conditions.
At an Age Action workshop on the topic, for example, one participant told how they felt obliged to give their adult child money each time they visited or the visits would stop. Tax efficiency: How to gift money in the most tax-advantageous way possible If you’re determined to pass on some of your hard-earned cash to your children, make sure you do it tax efficiently.
Given that the Revenue Commissioners are increasingly clamping down on gifts parents offer their children, on the grounds that thresholds exempting children from paying tax are being abused, read the fine print before you incur any unforeseen tax liabilities.
Up until recently, the Revenue took the view that parents offering money to their children for “support, maintenance or education” could be seen as a reasonable expenditure.
In this year’s Finance Act however, it restricted this definition to minor children, those under the age of 25 in full-time education, or adult children with a disability.
This means gifts, such as money towards a deposit on a house or a cash wedding gift, may have a tax liability if they exceed capital acquisition tax (CAT) thresholds. Another benefit which may have a tax liability is where children live free of charge in a house that isn’t the family home.
But what if you still have adult children living at home?
“Technically there potentially could be an issue,” says Beryl Power, tax director with PwC, but typically in situations where people are living at home, tax issues wouldn’t arise.
One impact of the change is that people will have to keep track of all liable gifts.
“Families are going to have to keep better records in terms of gifts,” says Power, to ensure they don’t exceed the thresholds or to keep account of any amount that does.
And if you haven’t had a look at these thresholds, it might be time to do so, given how much they’ve changed in recent years.
In 2009, for example, a child could inherit €542,544 tax free from a parent. This has been slashed back to €225,000.
This means if a parent has been funding the lifestyle of a child to the order of €10,000 or so a year, plus giving a gift towards a house deposit of €80,000, within 10 years the child would come very close to the limit. Once this limit of €225,000 is passed, CAT at a rate of 33 per cent will be liable.
Finally, remember that a way of gifting money, without impacting on the CAT threshold, is to offer €3,000 a year – be it for money towards a mortgage, childcare, a holiday, or whatever you wish.
Given that both parents can transfer €3,000 each, each year, a child can receive €6,000 in total. If a couple was to offer this to their daughter, son-in-law and two grandchildren, it would be a way of transferring €24,000 each year to a family with no impact on CAT thresholds.