How to best give away an early inheritance

Chances are you've heard about  'the great intergenerational wealth transfer'. It's all about the $3.5 trillion in wealth that the baby boomers will pass on through inheritances over the next 30 years.

An inheritance is always welcome. But for many, in our ageing society, the money won't arrive while they are saving for a home or raising a young family. The Grattan Institute found the vast majority of inheritances go to people in their 50s and 60s, by which time our biggest financial challenges tend to be behind us.

That's driving a new trend, one that is seeing Australians transfer part of their wealth today, while they are still very much alive.

It can be a win-win option. You help out a loved one when they need the money most - either to buy a first home, raise a family or pay for their own children's education.

And as Grant Hackett, CEO of investment bond issuer Generation Life, Money's 2024 Best of the Best winner of the Tax Aware Investing award, points out, the giver enjoys "a tremendous sense of satisfaction, and is able to see what a difference wealth transfer is making to the recipient's life".

Valuable tax benefits

As rewarding as this type of wealth transfer can be, it is worth considering how you go about it.

Gifting money is not always the answer as it can impact age pension entitlements. In addition, you want to be sure the money you hand over is used wisely, or at least for the purpose you intended.

Investment bonds are a simple solution that lets you tick all these boxes.

Issued by insurance companies, investment bonds work in much the same way as a managed fund.

A major difference is that they can offer valuable tax benefits.

Tax on investment earnings is capped at 30%, though the effective long-term tax rate can be even lower after applying franking credits and other deductions. The clincher is that tax is paid within the investment bond rather than personally by the investor. So, there is no administration or reporting for investors at tax time.

If the investment bond is held for at least 10 years, no personal tax is paid by the investor on withdrawals, although there may be a tax-assessable amount if you make a withdrawal before 10 years.

The tax-friendliness of investment bonds has contributed to their popularity as an estate planning tool. After all, inheriting a family home can trigger capital gains tax and, as Hackett points out, money inherited from superannuation - a 'super death benefit' - can be taxed at up to 32% (including Medicare levy) in the hands of a non-dependant.

Flexibility and certainty

If you're going to transfer part of your wealth while you're still alive, it's perfectly reasonable to want to say how the money is used. Investment bonds come to the party here, too.

"Ownership of an investment bond can be transferred at any time to your intended recipient with no personal capital gains tax consequences," says Hackett. And through an investment bond, people can have 100% certainty about how and when their wealth is distributed."

Certain product issuers also provide the flexibility to transfer ownership on a future date to provide certainty about when the asset is transferred. You can also choose a defined date (for example a 21st birthday) or limit how much can be accessed at any one time by the recipient. This can provide reassurance that a young or financially inexperienced recipient won't spend all the money in one hit.

For instance, with an issuer such as Generation Life, you can set up an investment bond for a 10-year-old grandchild to be transferred to them on their 18th birthday.

You may want to stipulate that they receive a fixed amount monthly from age 18, while they are completing tertiary studies. Then, after a further 10 years, the restrictions can be lifted altogether, letting you help your grandchild while they are buying their first home.

"If you change your mind, it is easy to change the terms of the investment bond simply by contacting Generation Life," says Hackett.

"The beauty of an investment bond is that it is very cost effective - far cheaper than using a testamentary trust. Generation Life doesn't charge any extra for administering who the bond is paid to, or altering the terms of the bond. This is all included in our low fee."

What to weigh up

Wealth transfers aren't just for the rich. Even small sums can make a difference to someone's life, and you can get started in a Generation Life investment bond with as little as $1000.

Just take care not to err on the side of being too generous. "None of us know our life expectancy," cautions Hackett. "Be sure your own personal needs can still be met."

Because investment bonds work along the lines of a managed fund, you won't be able to give a basket of your favourite shares to a recipient.

However, with a menu of 66 investment options available through Generation Life, you will definitely be handing a recipient the gift of diversification, and that can be the key to healthy long-term returns.

Generation Life Limited AFSL 225408 is the product issuer. The PDS and TMD at genlife.com.au should be considered in deciding whether the product is appropriate for you or to continue to hold the product.

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