We all earn to meet the goals there are in our life. We save and invest diligently and also create assets like homes, land parcels etc. Along the way, as we come close to retirement, we may have built substantial wealth and would most probably be doing quite well financially. Our children may be starting out in their lives, at that point.
Different parents react in different ways in such situations. The general wisdom is that after their lifetime, parents want to leave their wealth to their children. That probably will happen when the children themselves have retired or are near retirement. Just like their parents, they might have also created substantial wealth by the time they retire. So, additional wealth coming in as a legacy, while welcome, is not going to change anything for them directionally.
At the initial stages of their careers, if they had got some help from their parents, it would have been very welcome. Many parents do help their children too. But if they give a bit more thought and channelize their money to their children when they need it the most, it would be greatly helpful.
What is the right approach to gifting?
Gifting to children should be calibrated and nuanced. It should take into account the children’s position and needs. It should ideally support something that is constructive and will add value in the lives of their children like helping them with funding for an educational course, a home etc. In the initial stages, home is an area where many people struggle considering the capital costs today. Even some of the educational courses are quite expensive but can be very helpful while building one’s career.
Gifting at the early stages of the career of children is preferable as that is when they may need help. Most times, the parent’s money comes to their children as a legacy after their lifetime.
Parents can however avoid funding items of consumption like holidays, vehicles or other items which are discretionary and are indulgences. As a rule, children should find the money for these themselves.
How much to gift & control?
This is a question which can be answered only after knowing the purpose, the quantum of money to be gifted, whether it is equitable for all concerned and most importantly it should not impact the giver negatively in any way.
One needs to be aware that whatever is gifted becomes the other person’s property and one cannot get that back. Hence, one needs to give proper thought before considering gifting, especially the larger ones.
As mentioned earlier, many parents gift their children for purchasing homes. If the quantum is large, the property should also include them as a co-owner to the extent of their contribution to protect their interests. The parents can eventually share the property to them after their lifetime. This achieves the double benefit of helping the children as well as ensuring that the gifted portion still is controlled by them.
Sometimes, the parents allow a lien on their property while children take a loan for education or other purposes. This is dangerous especially if that home is their residential property as any default by their children, intentional or otherwise, can jeopardise their home.
Taxation on gifts received
If a sum of over Rs.50,000 is gifted by anyone other than a relative, it will be taxed. If a relative ( as defined by IT authorities ) gifts then there will not be any tax incidence in the hands of one. Relative means parents of both spouses, spouse, siblings of self/ spouse, siblings of parents and parents in law etc.
Also, any asset received at the time of marriage by the donee from anyone at all, is exempted. Also, money received by way of a will is also exempted. There are some other situations as well for which one can refer to the IT site.
Gifting is a potent tool to transfer wealth to the children or close relatives when they need it the most. It is not used much as it should be, especially to help children during the initial years of their career – for education, home purchase etc.
Many reckon that their money will go to their children anyway, after their lifetime; while that is correct, it may not be as helpful then as it can be when they need it. Getting wealth after the parents’ lifetime does not help the children. Gifting however should be done judiciously after ensuring that it does not affect the donor in any way.
Timely assistance increases its value manifold. Gifting should hence be the fulcrum using which the children will pitchfork their life itself to another level.
Suresh Sadagopan is the MD & Principal Officer at Ladder7 Wealth Planners and is the author of the book If God was your Financial Planner