They call it the Rinehart Paradox. It describes the plight of a growing group of affluent parents who have failed to teach their children to handle wealth responsibly and so refuse to leave them any. It was coined in 2012 to describe the heiress Gina Rinehart, who tried to disinherit three of her four children. She said they lacked the ‘requisite capacity, or skill or knowledge, experience, judgement or responsible work ethic’ to manage the family mining business worth $18.1bn, and an inheritance worth up to $250m a year. Of course, the children did what all rich kids know how to do: they hired lawyers. The case is ongoing.
Wealthy parents are now trying hard to avoid the Rinehart Paradox by announcing (often to the press) that they will not be providing financially for their children. Prominent examples include billionaire Bill Gates, who plans to give the bulk of his wealth to research into healthcare, leaving ‘just’ $89m for his three children. Then there is Warren Buffett, who says he’ll be giving away 99 per cent of his fortune (most of it to the Gates Foundation, rather than his three children). Buffett’s children are famously down-to-earth — though each was given $1bn in 2006 to invest in a charitable organisation of their choice, followed by a further $1bn each to donate in 2012. Gates and Buffett are joined by former Mayor of New York Michael Bloomberg, who has pledged most of his $22.5bn fortune not to his two daughters but to non-profit organisations. His motto is: ‘The best financial planning ends with bouncing the cheque to the undertaker.’ And other high-profile examples are also emerging including Sting, Andrew Lloyd Webber and Nigella Lawson, who is ‘determined that my children should have no financial security. It ruins people, not to have to earn money.’
‘If you raise your children one way and then change the rules, you are really dealing with your own inadequacies,’ says Nigel Nicholson, professor of organisational behaviour at London Business School. ‘The aim is to stop them living in a bubble.
But let’s face it, we’re not all Gina or Sting. The vast majority of us have a well-earned nest-egg. Our children are not spoiled brats, but are down to earth and, now, tragically struggling to make the same financial gains that we were fortunate enough to achieve. For many, the biggest gains have been in property. As a result, it is nearly impossible for a large number of first home buyers to step up onto the property ladder, due to price and earning capacity.
So isn’t it only fair that we help this generation, not cut them off and tell them to sort it out themselves. After all, the previous generations have been the lucky beneficiaries of a growing economy and population that has left them in a comfortable position. Such opportunities are now nearly impossible for first home buyers to enjoy.
It is important for children to understand that inheritance is not a given. It may be a nice top-up later in their lives, but to the extent that we are all living longer, that might not be for a very long time. Our children need to understand that they are better off making and managing their own wealth and financial security. Don’t avoid discussing this. People have a habit of holding out for the inheritance and missing opportunities of their own. Teaching your child to be financially independent is key.
But what if there’s a more responsible way for parents to help their children with inheritance, a way that the parents can invest their money, making a return and still assist their children in a challenging property market.
La Trobe Financial launched its Parent-to-Child (P2CTM) product in 2014 to allow parents to set the terms at the start of a loan and leave the management of that loan to the independent lender. A loan of this kind means there’s less danger of the family feuding over repayments, because there’s greater protection for both parties around assets and savings, especially if the borrower runs into difficulties.
By using a mortgage product like this, administered by an independent party such as your bank, you can minimise the strain on relationships when offering your child financial assistance. Such mortgages also mean your home is not used as security, your credit rating is not at risk and your children can still qualify for grants and concessions. The flexibility of this loan even means both sets of parents can contribute to the loan rather than all the weight resting on one party.
Going down the traditional route of lending money to your child directly or providing a bank guarantee can mean in the worst case scenario, you could end up losing your home or compromising access to your retirement funds. Signing on as a co-buyer might also seem like a good idea, but your child could miss out on the First Home Owner Grant or stamp duty concessions and investing in property may be less tax effective for you than leaving that money in superannuation.
And ultimately, lending money to family is an emotional thing, entering into a financial arrangement with your child can strain even the strongest relationship. If you provide an informal loan it’s you that carries all the risk.
Parent-to-Child mortgage products mean that you can remove each of these factors. You are able to help your children, you are able to make a investment and you can carry on enjoying your retirement years safe in the knowledge that you have also done the right thing by the next generation.