Ask Paul: Should we borrow $600k to set up our grandchildren?
Would you borrow $600,000 in your 70s to leave a legacy for your grandchildren?
Reader question
Hi Paul, my husband and I are wondering if we are planning intelligently or losing the plot.
He is 75, I am 72, both with super funds in pension mode, collective income about $180,000. We have about $500,000 in the bank, and about $50,000 in direct shares.
We have a 200-acre farm with a house and the land leased out in South Australia's mid-north (currently recovering from drought) that we use from time to time to visit one half of our family who pay for the privilege of using the land, which is valued at about $600,000.
We have owned an investment property, a '60s house in an inner northeastern suburb of Adelaide for a while and it's getting tired. We've been offered $700,000 for it as is by developers. We have embarked on subdividing the block and building one three-bedroom rooming house (SDA Improved Liveability standard) and a two-plus-one carer SDA Fully Accessible standard house.
We are budgeting a total cost for the development of $970,000, resulting in a value of $1.8 million and an income increase from $30,000 to $127,000 (less expenses) and a loan of $600,000 (and one or two years without the $30,000 rent).
Our object is to provide a 20-30-year legacy for our six grandchildren to share through a testamentary trust. Have we lost the plot or is it a sensible plan? We're long-time readers of Money. - Lynda
Paul's response
No Lynda, you have not lost the plot. At your ages of 72 and 75, I do get nervous about risk and the permanent loss of capital. I should say I am 70 and my wife is 69. Due to this, we've moved into debt-free mode, but our investments remain very heavily growth orientated.
We like to have a couple of years cash to carry us through an inevitable big market downturn at some stage, don't ask me when or why, but every century we seem to get around three of these. I'm not silly enough to argue against thousands of years of history.
Initially, upon quickly reading your email, I thought uh oh debt in your seventies. But when I did a careful read I saw that on top of a large pot of super that is generating $180,000 a year for you, you have $500,000 in cash. You will, I assume use some of this for the development, plus the $600,000 loan.
In an emergency, your super, which is fully accessible to you, would easily cover the loan. But please spend some time making sure you have carefully planned for the downside. As you know the rule to look after kids and grandkids is to first and foremost be financially secure.
I can see the safety argument you would make. You will own your home, you have equity in the farm and a lease payment for its use. There is a stack in super, your cash, plus $50000. The Adelaide property market is very strong and many big projects in South Australia mean many jobs. I can see that another safety valve is an ability to sell the project partially completed.
In summary, while debt in our seventies is not my favourite, I can see your 'safety cover' if things go wrong. As you know, there will be some stress points building the property, but that is pretty normal.
On a positive note, I love what you are doing for the grandkids. What a great legacy. I note it goes into a testamentary trust, great idea. I presume your kids will be trustees? The fact you have set up this trust as part of your estate planning means you have had legal advice and I am sure you have considered how the six grandkids will be treated if in decades to come, one needs money for one reason or another.
You can't solve every problem regarding the grandkids in a couple of decades, it depends how their lives pan out, but it makes sense to have a structure that copes with drama.
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