Ask Paul: We subsidised one child's rent, now there is friction

Dear Paul,

I am 64 and retired last year. I have $1.7 million in super in a retirement income account. 

My wife has been a full-time babysitter for our grandchildren for many years and only has $60,000 in super. We own our home, which is worth about $1.1 million. 

We also have an investment property worth about $750,000. We have a mortgage on this property (secured by our home) but the full amount owed ($200,000) is in an offset account and being paid off at the agreed monthly rate. 

We have rented the investment property to one of our two kids for 12 years at about 75% market rent, which has caused a little friction with the other child. 

My question is whether there is a way we could sell the investment property to the child who is renting it as they have little hope of being able to purchase another property with current market prices and interest rates. 

I need to ensure there is some balance in the amount of help given to the two kids and will need to keep the purchase close to market value so we have funds for our future needs. 

I'm also considering the option of downsizing our home in six years and moving into the investment property to help avoid capital gains tax (CGT). 

Do you have thoughts on what to do, or not to do, to help our kids but ensure we have enough money to see us through the rest of our lives?  - Greg

Goodness, Greg, you have given me some solid facts, but here the wisdom of Solomon is required, which, sadly, I do not possess. Anyway, I'll have a crack!

The key missing fact is what you and your wife spend each year, but I can reverse-engineer that and talk about what you could spend.

History indicates that you could draw about 5% of your super, if it's in a balanced-type fund, pretty much forever and still have $1.7 million, plus inflation.

Again, looking at historic returns, you could probably draw about 8% and still have $1.7 million but not keep pace with inflation.

I know others who are perfectly happy to draw well above 8% from super, run down their capital to the age pension assets test limits and then draw an aged pension to top up the later stage of their lives.

These are all valid strategies, with the most important issue being not to die too rich.

With super alone, a 5% drawdown gives you, tax free, $85,000 a year; 8% would give you a pretty handsome $136,000. To that add the discounted rent from your son.

If this is enough to fund your lifestyle, great!

We have three adult kids, and grandkids, so Vicki and I face the same issues.

Our absolute rule No. 1 is that, regardless of their own financial success, all three kids are always treated equally.

As you mention, it causes huge problems if one child is favoured. I've seen the best of families fall apart over this.

Sure, you could sell the investment property to the child living in it and then establish in your estate an amount, allowing for inflation, to rebalance your other child.

What I am unsure about is how moving into it works with your child living there? Where do they go? It sounds as if they need your rent subsidy as it is.

I would not get too wrapped up about future CGT when the investment property is sold; it is the big picture that I think is important.

I want you to look at your spending. It may be that super, plus rent, does the heavy lifting for you. Then you and your wife need to consider where you want to live.

Don't sell your home if you prefer living there. That would be silly.

If you choose not to move, freeing up capital to balance out your children's level of support, I really wonder if you would not be better off to just keep renting the investment property to your child and let both kids know the rent subsidy will rebalance the help for your other child in your estate planning.

My suspicion is that drawing from super and the rent from your investment property probably solves your income needs.

Next, you need to decide where you prefer to live. Then, in your shoes, we'd be renting, not selling, the investment property to one child, unless we could give the other child the same financial benefit.

Finally, when you do decide to give substantial assets, be it cash or property, to either child, please talk to a good estate planning lawyer.

These big moves must be legally documented and I would suggest family wealth is protected from relationship break-ups and business-related issues with appropriate legal protection to keep family money in the family.

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