Sharing a windfall with family may seem a kind gesture but with the restrictive rules surrounding gifting and trusts, you can’t simply give it away.
My wife and I are both in our 70s and are part service pensioners. We have a small allocated pension and Defence Force Retirement & Death Benefits pension and I am totally permanently incapacitated.
We have had a windfall on the share market and would like to set up share funds for our five grand children (ages 9 to 16), possibly $20,000 each.
I appreciate that this will still be assessed as assets for pension purposes (DVA advised me that they were only interested in assets, not capital gains) but I would like to know the best way to set the share funds up. My wife would like to just give the money to our children for them to set up the funds, but I prefer to maintain control until they are 18 at least. My wife’s concern is that it will make our estate more complicated for the executors (son and daughter) to finalise but I am not sure of that.
This is quite a complex matter and we are not licensed to give financial information, any advice given is general. We sent your question to National Information Centre on Retirement Investments Inc (NICRI) to get a better idea of how you should proceed. Note, the information received from NICRI is also general and does not constitute financial advice.
Response from NICRI
I refer to the questions raised below. This would probably be financial/taxation advice so it would be prudent for you to seek this advice from their financial planner and/or accountant. There are a few issues that need to be considered which I have listed below:
· If the funds are passed directly to your grandchildren then ‘gifting’ rules apply. This may have an impact on your part service pension. Government Income Support recipients are allowed to ‘gift’ up to $10,000 per financial year but not exceed $30,000 over a five-year period. Any amounts in excess of these thresholds will be counted as though you still own those assets for five years, even though you will not receive any returns/earnings themselves. In this case, giving $100,000 in any one year, to be split amongst five grandchildren would mean that you exceeded the $10,000 threshold and the excess of $90,000 will still be assessed for the service pension for five years. This may or may not be a major issue for you, but you can confirm the effect with a Financial Information Service officer from Centrelink/DVA. Taking these rules into account, it would take more than 15 years to pass the funds to the grandchildren and not exceed the caps.
· If the funds are held in trust for the grandchildren, then you will be ‘trustees’ and therefore be responsible for the funds. This also means that these funds will be assessed for your service pension under the assets test and deemed under the income test, just as it would be if you continued to own the funds yourselves.
· If the funds are from the proceeds of shares or even if the shares are transferred to the children/grandchildren then Capital Gain Tax (CGT) would apply (unless the shares were acquired prior to 20 September 1985). You would need to allow for this if it results in a tax liability.
· Special taxation rules apply to Australian resident minors (unmarried and under the age of 18 at the end of the financial year) who generate ‘unearned income’. Currently if the minor generates unearned income of more than $416 and less than $1308 in the financial year, they are taxed at 66%. If they generate $1308 or more, then the whole amount is taxed at 45%. Unearned income includes dividends from shares and interest from investments/bank accounts. It does not include earnings from employment or from deceased estates.
One option you could enquire about with an advisor (which may or may not be appropriate) is the potential use of an investment bond. This could be set up in your name or the children’s names. Child advancement policies, which may be an option on insurance bonds, allow you to nominate an age when the ownership transfers to the child. Investment bonds operate along the same lines as a managed fund and are ‘tax paid’ if held for ten years. If the funds are not accessed in the first ten years, then you would not have a personal tax liability on those funds as the fund pays tax at the company tax rate (currently 30%). Funds accessed prior to ten years would have tax consequences depending on the owners marginal tax rate at the time. Gifting rules and potential CGT may still apply as per the first and third dot point and asset allocation options available may or may not suit your needs and objectives.