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Money Times - December 5, 2017

Posted by Jill Kerby on December 05 2017 @ 09:00

WILL THE BANK OF MUM & DAD BE A HOLIDAY BURDEN OR A JOY?

 

Will the Bank of Mum & Dad be opening its virtual doors for business for the first time this Christmas?

Will it be tapped by teenagers looking not just for some extra cash to pay for a night out with their mates, but also by younger children, eager to take part in the holiday shopping experience? (“Oh, Mammy, can I get that for Grandda? He’ll love it. Pleeeaase?” 

With no money of their own, the elusive BM&D and credit line (“Ah sure, I’ll use the credit card”) is quickly identified by the kids as a source of retail pleasure and success.

I am of two minds about the Bank of Mum & Dad

Properly constructed and operated, even as a ‘virtual’ concepts, the BM&D can be an excellent learning tool for youngsters who see their parents saving money into it (child benefit payments, for example) for the good of the family and into which they can add their own money in their own “account”.  This accumulating money can then be drawn down for worthy purchases – school trips, family holidays, Christmas presents, family donations and eventually small loans that can be repaid. 

Savings rewards that parents mete out – like interest (no longer paid by post offices and credit unions on tiny sums) and even annual saving bonuses -  can act as important savings incentives and can even youngsters understand the downsides of instant gratification.

A child who is given their first piggybank at an early age, into which they ritually saved part of a weekly allowance, payments for special jobs around the house or garden, or birthday money can then graduate to either an account with the BM&D or a conventional post office or credit union account. The BM&D that adds a top up reward  - “For every €10 you save, the BM&D will add 5%, or 50c” – is always going to be more appealing.

Spending some of their savings or earnings on other people – at Christmas, for example – is an experience that young children really enjoy and if all goes well, the properly run Bank of Mum & Dad can also become a source of loans and credit (and yes, gifts) for stuff that matters:  school trips, college fees, weddings and yes, even house down payments because it has accumulated real and emotional/social capital from the chief savers/investors, the parents, as well as a the children.

Unfortunately, a recent conversation with an accountant friend suggests that the Bank of Mum & Dad (even if they don’t call it that) is too often just an endless drag on financial resources by adolescent and adult children who a) can read the guilt signals emanating from exhausted, working parents; b) have been discouraged to work in their spare time to instead devote as much time to the points races c) are already life-long consumers who know no better.

It’s a dangerous combination, she said, especially today’s middle-income parents of “high achiever” children who already live paycheque to paycheque.

“Inevitably, at this time of year [tax deadline] some client will admit to being approached by an adult child for substantial money – say for a downpayment on a house, but also for post-graduate fees or even a wedding.  It could be €20,000-€30,000.

“They often say, ‘we’ll have to take it out of our savings, or retirement lump sum, or borrow it’ for them. They ask if there are any tax deductions. They are often embarrassed to admit that they just can’t say ‘No’”.

For those semi-resigned BM&D parents, my accountant friend suggests they take tax, legal and financial advice. 

Accumulated cash gifts that exceed the annual €3,000 capital acquisition tax (CAT) exemption could eventually carry a CAT liability for the beneficiary if they exceed the €310,000 lifetime tax-free threshold between parents and children and the €32,500 limit for grandchildren. All third level/post graduate education costs are exempt up to age 25. That full time college student under 25 can live rent free (and gift-tax free) in a parent-owned property. So are wedding expenses paid for by the parent, but not the wedding gift that exceeds €3,000…or that house downpayment.

Banks of Mum & Dad work best if founded with the best intentions, like not wanting youngsters to be burdened by student debt upon graduation, or by recognising the big property wealth transfer that has happened in Ireland, by helping your less advantaged children to become first time buyers.

But realistically, unless you have substantial resources, most parents will need to assess the impact that cash gifts might have on your long term financial position. Can outright gifts be turned into zero interest loans? Are there tax implications? To avoid accusations of favouritism should you adjust your wills?

It’s Christmas. Is the Bank of Mum & Dad open or closed?

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