Passing on wealth while alive or through a Will: Which is better?
Written and accurate as at: Jul 12, 2024 Current Stats & Facts
With the average person living longer these days, many are choosing to bestow some of their assets to their loved ones during their lifetime. Doing so has its advantages, but how does it compare to waiting until you pass away?
Below, Katerina Peiros from Hartwell Legal helps us weigh up some of the pros and cons.
Things to keep in mind when passing on your wealth while alive
There are plenty of reasons why passing on some of your wealth while alive might appeal. Not only will you be around to see your family enjoy their inheritance, it can give your children or grandchildren a chance to achieve their goals — such as purchasing a home or starting a family — sooner rather than later.
Some parents or grandparents opt to do this in the form of a loan, oftentimes with the proviso that it will be forgiven at the time of their deaths. Assuming this is done formally (you have a deed of loan drawn up), this might help safeguard the money against creditors, as well as prevent it from entering the pool of divisible assets if your child ever gets divorced.
Of course, there are downsides to gifting your estate while alive. For starters, it might impact any social security you receive. Under current rules, you’re only able to give away up to $10,000 worth of assets each year and $30,000 over five years without it affecting your pension entitlement. Any amounts above the allowable gifting limits will count towards the Age Pension assets test.1
Another issue is that you might need those assets later on in life. Your retirement might last 30 years or more, and you’ll need to make sure you have savings and income to live on. There’s also the matter of aged care. Many people underestimate how much quality aged care costs — and how difficult it can be to find the funds to cover it. This goes doubly so if one spouse continues living at home, which can be a strain if couples don’t have much else in the way of liquid assets.
What to know when passing on your wealth via a Will
Compared to handling everything while alive, passing on your wealth via a Will might seem much more straightforward. You’ll be able to appoint someone you trust as an executor, and it will be up to them to distribute your assets in accordance with your wishes.
There might even be fewer tax obligations for your heirs to worry about. For example, if you intend to give your children the family home, a full CGT exemption might be available to them if they sell within two years of your death (so long as the property was always your main residence and not used to generate any income).2
But plenty of problems can still crop up. For starters, there’s always the chance that disputes will arise between beneficiaries — along with anyone else who feels they’ve been left out — and you won’t be around to provide any guidance or help them to resolve things.
To minimise the chances of this happening, one option might be to set up a testamentary trust, reducing the size of your estate by gifting certain assets while alive, and ensuring that anyone who is eligible to contest the Will is given a fair share. It might also be worth appending a statement of wishes to your Will. Though not legally binding, this can communicate to your children the intentions behind your decisions.
It’s also important to review your Will regularly to make sure it still reflects your wishes. This might involve updating it following any major changes — such as the death or birth of a family member, divorce, or remarriage — and informing your executor so they’re not taken by surprise when it comes time to fulfil their duties.
For advice tailored to your needs, consider speaking to a qualified financial adviser or estate planning lawyer. And if you’re thinking of passing on your assets while alive, make sure you understand the consequences and aren’t facing any pressure to do anything not aligned with your values or wishes.
Sources
1 Services Australia
2 Australian Taxation Office