Advisers’ role in facilitating ‘taboo’ money discussions with family

It is no secret that many Australians are currently struggling to get onto the property ladder after years of skyrocketing prices and high inflation rates driving up interest rates on mortgages. As a way to combat this, more parents now find themselves loaning money to children for a down payment on a house.

Speaking with ifa, Jonathan Scholes, Findex head of advice, explained that mixing family and finances can be particularly tricky for Australians as discussions around money are often considered “taboo”, which can lead to confusion down the road.

Even so, he emphasised the importance of engaging in frank conversations with family about their finances, particularly if they are considering gifting or loaning money.

New research from Findex revealed that Millennials and Gen X are particularly at risk of finding themselves in a “generational squeeze” between children and parents that both require financial support.

Because of the age of this cohort, they are more likely to be in a position where they are helping elderly parents financially as they enter aged care while also having children that are either financially dependent or just generally in need of help due to the high cost of living.

Although it is done with good intent, this can create some financial complications down the line as they find themselves entering retirement with significantly less.

While clients may recognise some of the risks associated with doing this, PlanningSolo founder Jordan Vaka explained that situations like this are where advisers can provide a lot of value as they guide them through decisions.

Of course, it’s important to recognise that it can be difficult for clients to approach situations like this subjectively, particularly when it comes to their children and feeling of familial obligation.

However, Vaka explained that advisers are able to assess the situation from a more objective lens and clients understand how removing a large sum from their retirement savings could impact them in the long run.

While it’s never an adviser’s place to tell their client they can’t do something, Vaka said it is important for advisers to engage in these conversations and provide guidance on the potential risks associated with their decisions.

Echoing this sentiment, Scholes explained that at the end of the day, clients will do what they want to, even if it is against the advice they’re given.

“I always say it’s not necessarily a financial planner’s job to tell a client how to spend their money. It’s to make sure they understand the implications of how they spend their money,” Scholes said.

“So, if someone wants to put themselves in a position where they might be sacrificing their standard of living in retirement, that’s their choice to do that, you know. And some people will do that. Many, many, many parents will do that for their kids.”

Let’s involve the lawyers

There will, of course, be those who choose to go ahead with loaning money, in which case Vaka suggested that putting a contract in place might be the best option for everyone in the long run.

“We work a lot with family lawyers, so we talk a lot about binary financial agreements, or what’s called a prenup for a lot of people,” he said.

“The idea is that you make these agreements while everybody likes each other, so that when people don’t like each other, you have a game plan of how you get out of that. I think these kinds of family loan agreements, they should be considered in the same way.”

While he conceded that this could rub some people the wrong way, whether that be the parents or the children, Vaka explained that creating a contract protects all parties if something does go wrong.

“People get very offended. ‘Oh no, my kids wouldn’t do that. No, I trust them’, in which case, you always just say, ‘Well, OK, how do you feel about their spouse or their in-laws if they get involved?’ Because then you’ve got lending consequences, too,” he said.

“I mean, in the separation environment, if you’ve given money to your children, and then your children separate, the money, if it’s a gift, that money forms part of the asset pool, and their now estranged spouse will have access to that money so they can split it.

“If you’ve done it as a loan, that protects that to a degree. So, you call that a loan and it comes off the top of the pool, and then your child and their former spouse split off the left, it protects your money.”

While those who lend money to parents may operate under the assumption that they will get that back in their inheritance, Vaka said this can get somewhat tricky when lending money to children, especially when they aren’t willing to have clear and honest conversations.

“Lending downwards brings a whole other set of risks as well, which, if you’re lending to your children to help them buy a house – again, admirable, get them into the market,” Vaka said.

“[But] how do you get that money back? Is there a plan to extract out of that deal to get your money back? Or is it an open-ended loan that they’ll pay you back when they can?

“It becomes a really difficult thing, and if people aren’t having conversations about money, that makes all of this even worse.”

He explained that if they don’t engage in open communication when lending money then they run the risk of each party making their own guess at what needs to be done, and these misunderstandings can have damaging consequences down the line.

“It means people are coming toward it with presumptions and assumptions, and if they’re never articulated or explored, then they’re often wrong, or they’re often different,” Vaka said.

“Mum and dad might have one viewpoint, and son and daughter-in-law may have a very different viewpoint. If they’ve never talked about that, that’s where conflict happens, and that’s where family breakdowns occur.”