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Many grandparents wish to provide their grandchildren with a head start in life, and a popular way to do so is by gifting money to help pay for school fees. While simply contributing at the time the fees are due is one option, some grandparents prefer to plan ahead by setting aside funds in a dedicated account. While this approach can be effective, there might be more strategic ways to gift money to maximize the benefits for both the grandchild and the entire family.
Plan A
Donna and Simon are a typical example of grandparents who want to make a significant present for their granddaughter Ellie’s future education. They decide to gift $50,000 into a term deposit to help cover Ellie’s school fees when she starts secondary school in 10 years. With an interest rate of 2.6% per annum (pa), the $50,000 will grow to $64,631 by the time it’s needed, providing a helpful present toward Ellie’s education.
But is this the best way to use that $50,000 gift?
While a dedicated account and its visible growth are nice, it’s essential to consider the overall pool of money available to the family when the time comes to pay for Ellie’s school fees. There may be an alternative way to leverage the present to generate more value for the family.
Plan B
Ellie’s parents, Sara and Shane, are currently paying off their mortgage with a remaining balance of $530,000 at an interest rate of 5% pa. Their monthly repayments are $3,500. If interest rates and repayments stay consistent, their mortgage balance will be reduced to about $329,427 in 10 years.
What if, instead of putting the $50,000 into the term deposit, Donna and Simon chose to present the money directly to Sara and Shane? They could deposit the gift into their mortgage account, effectively reducing the principal and helping them pay down the loan faster. By maintaining their regular repayments, Sara and Shane’s mortgage balance in 10 years would be approximately $247,077, giving them more equity in their home to draw on when the time comes to pay for Ellie’s school fees.
Difference
In Plan A, the $50,000 gift would grow to $64,631, providing a net benefit of $14,631. However, Plan B offers a significantly greater benefit, with the $50,000 gift contributing to a reduction in mortgage debt, resulting in a net benefit of $32,350!
Of course, for Plan B to work effectively, Donna and Simon would need to trust Sara and Shane to use the present as intended, without using it for other purposes such as vacations. Additionally, if Donna and Simon are receiving or planning to apply for the age pension in the next few years, they must be aware of gifting rules and how this gift could impact their pension payments.
Get Gift Advice First
This example highlights how thoughtful, intergenerational financial planning can significantly increase the wealth of a family unit. If you’re considering gifting money to your children or grandchildren to assist with education, property purchases, or other important needs, it’s crucial to speak with a financial planner first. A financial advisor can help you explore the best strategies for gifting, taking into account factors like tax implications, age pension eligibility, and long-term wealth accumulation. They will ensure that you’re using your resources in the most efficient and beneficial way possible, helping you make a positive impact without unintended consequences.
Gifting is a powerful tool, but without the right strategy, it could have unforeseen financial effects. For example, giving large sums of money without considering the broader context could inadvertently impact your own financial situation or your beneficiaries’ financial future. By working with a financial planner, you can ensure that your gift is structured in a way that maximizes its impact—whether that’s through capital growth, tax efficiency, or meeting specific needs like funding a child’s education or boosting a grandchild’s home deposit fund.
Read this great article on gifting grandkids in the Australian Financial Review.
