Case 072Client situations and behaviourCore
Parents aged 70 with Rs 9 crore need Rs 30 lakh a year. Their two children ask for Rs 3 crore now for a business. Test whether the parents' plan survives the gift, and what size of gift it can bear.
1The situation
The Hegdekar parents, both 70, have Rs 9 crore invested and no pension. They spend Rs 30 lakh a year, and plan for that to rise with inflation, taken as 6%, until age 95. Their portfolio, mostly in debt and balanced funds, is expected to earn 7% a year; spending is drawn at the start of each year.
Their son and daughter are starting a business together and ask for Rs 3 crore now. The parents want to help and ask you whether they can afford it. Gifts from parents to children are generally not taxed in the children's hands under the relatives framework, but confirm current rules before the transfer.
2Your task
Does the plan survive a Rs 3 crore gift, and what is the largest gift it can bear?
Quick check
After a Rs 3 crore gift, the withdrawal rate rises from 3.3% to 5%. What happens to the plan?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
A Rs 3 crore gift breaks the plan: the money runs out at about age 93. Twenty-five years of Rs 30 lakh rising 6% a year, with 7% returns, need about Rs 6.72 crore today. That leaves room for a gift of at most about Rs 2.3 crore, or about Rs 0.9 crore once a 20% margin is kept for bad markets and health costs. A loan or a staged gift would help the children without risking the parents.
Step 1How much do the parents need for themselves?
The oxygen mask rule on an aircraft applies to money too: secure your own supply before helping anyone else. The parents' own plan needs the present value of 25 years of spending that starts at Rs 30 lakh and rises 6% a year, discounted at the 7% the money earns: about Rs 6.72 crore. Because spending grows almost as fast as the portfolio, the real return is only about 0.9%, so each future year's spending costs nearly as much today as it will then.
| 30 x 1.06^t | spending in year t, rising with inflation |
| 1.07^t | discounting at the portfolio's expected return |
| 900 | the parents' corpus in lakh |
Step 2What size of gift can the plan bear?
Rs 9 crore less Rs 6.72 crore leaves about Rs 2.3 crore, the most they could give with everything going to plan. Nothing goes exactly to plan for 25 years, so keep a margin: holding 20% more than the need, about Rs 8.06 crore, leaves room for a gift of about Rs 0.9 crore. The margin covers a poor decade of returns early on, a health event, or one parent living past 95.
| Gift, Rs crore | Corpus left | First-year withdrawal | Outcome |
|---|---|---|---|
| 0 | 9.0 | 3.3% | lasts to 95, Rs 12.4 crore left |
| 0.9 | 8.1 | 3.7% | lasts, with a 20% margin |
| 2.3 | 6.7 | 4.5% | lasts exactly, no margin |
| 3.0 | 6.0 | 5.0% | runs out at about 93 |
Step 3How can the parents help without breaking their plan?
Offer structures, not a flat no. Give about Rs 0.9 crore now and lend the rest on written terms, so the money comes back if the business succeeds; or stage the gift, releasing more only when the business hits agreed milestones. A loan also keeps the gift fair between the two children if one later leaves the business. The limit: the 7% and 6% are assumptions, and a two-point shortfall in returns over 25 years moves the answer a lot, so the plan should be re-run every year.
Where candidates lose it
The trap is comparing a 5% withdrawal with a 7% return and saying the plan survives. Spending rises with inflation, so what matters is the real return, about 0.9%, and at that rate Rs 6 crore does not last 25 years.
The second miss is answering yes or no. The interviewer asked what gift the plan can bear; give a number, keep a margin, and offer a structure that helps the children anyway.
What the interviewer asks next
- The parents also own a house worth Rs 4 crore. Does that change the gift they can make?
- How would you structure the loan to the children?
- One parent dies at 80. How does the plan change?
Company names and figures are illustrative.