It is estimated that between 60-70% of first home buyers in New Zealand seek help from their parents to purchase their first home. If your children come to you looking for assistance, should you help and what do you need to consider?
Loans vs Gifts
While you may be in a position to hand over funds to help your children now, will you need that money in the future or are you able to make an outright gift? Sometimes this is referred to as an advance on your child’s inheritance. This may ultimately depend on the amount to be advanced.
Some lenders require that any money advanced by parents for a deposit is an outright gift. While this makes it easy for the bank to fit borrowers into nice tidy boxes in terms of the bank’s lending criteria, it can seriously disadvantage the parents.
Parents who have a modest home with modest savings are seldom in a position to make an outright gift of their retirement savings. If you do, you may find that, years later your generosity comes back with a very big sting in its tail if you’re in need of rest home level care.
Guarantees
Sometimes banks ask parents to guarantee their children’s borrowing. Before agreeing to act as guarantor you must understand what you are agreeing to and what the consequences are if your child defaults on mortgage payments.
Many guarantees are written so that the guarantor is providing an unlimited guarantee for current and future borrowing. This means that your child could increase their borrowing for overseas travel, a new car or to feed a gambling addiction without your knowledge and you could be responsible for the additional borrowing as well as the initial borrowing to purchase the home. Ideally you should limit the guarantee to a specified amount and not for future borrowing.
What happens if the lender seeks to enforce your guarantee? Can you afford to repay the loan? Will you lose your home if you can’t repay the loan? Any person who agrees to guarantee a family members borrowing needs to be independently advised prior to signing the guarantee.
Residential Care In Later Years
Many people who need rest home level care in their later years are surprised to find that gifts made to their children, sometimes years or even decades earlier, are treated as deprivation of assets for residential care purposes. Where the Ministry of Social Development decides that there has been deprivation of assets, the Ministry has the option to treat an application for a residential care subsidy as if those assets are still owned by the applicant.
For example, while in their 50’s Mum and Dad gift each of their two children $100,000 towards the deposit for their first home. Mum and Dad own their own home and have some savings in the bank. They later sell their home and purchase an occupation licence for a villa in a retirement village. That occupation licence cost almost as much as their home. Over time, their retirement savings are reduced by general living costs, retirement village monthly fees and some private medical treatment where the public waiting list was too long.
Eventually one parent dies and the other needs to move into rest home level care. 30 percent of the value of purchase price of their occupation licence is lost to fees and as a result, assets owned by the surviving parent are, by this time, below the cap for receiving a residential care subsidy. An application is made for a residential care subsidy. The application process raises the fact that the parents made the two gifts to the children over 20 years earlier. The Ministry of Social Development, which administers the residential care subsidies, determines that had those gifts not been made, the surviving parent would have been in a position to pay for his or her own care. As a result the parent must contribute $200,000 (that they no longer have) towards their residential care costs.
Protecting Loans and Gifts From Relationship Property Breakdowns
We all hope that our children make good choices when settling down with a partner. Unfortunately relationships do not always work out. If you decide to lend money to your child and their partner it is prudent to record the loan in a Deed of acknowledgement of debt that both your child and their partner signs. Even if you are not expecting the money back, the deed should record that in the event of the relationship ending, the death of either your child or their partner or the property being sold, the money needs to be repaid. If the bank insists that the money is a gift, not a loan, then your child should contract out of the Property Relationships Act (known as a pre-nuptual or contracting out agreement) recording that the money is not relationship property. This can prevent the partner leaving the relation with half the money you gave to your child.
Family Breakdowns
What happens if you and your children have a falling out? The case of Mr and Mrs Warin is a warning to all parents. Mr and Mrs Warin lent their daughter about $368,000 a number of years ago. They eventually needed the money themselves and asked their daughter to repay the loan. The daughter, an accountant agreed that the money was a loan but, despite owning more than one property the daughter did not repay the loan forcing Mr and Mrs Warin to go to court in an attempt to force the repayment of the loan. The family’s personal affairs became a very public dispute that was splashed across the front pages of several major newspapers.
Would you expect repayment of the loan? How would this be recorded? How would a demand for repayment be dealt with? What happens if you have a falling out with your child? All these things need to be thought about and recorded in writing just in case things go wrong.
Record Your Agreement In Writing
If you decide to give or lend your child money to purchase a home, record the details in writing. Is it a loan or is it a gift? This is the basis of many family disputes that reach the courts. If you don’t expect that the funds will be repaid, but you want to ensure that the funds are available if you need them, record this. If the money is an outright gift, record it and if the money is a loan, record the terms of the loan. Should you retain the option to register a mortgage over your child’s home or register a caveat? Remember, you may not be the person dealing with a dispute – it may be your executor or attorney, or it may be an official assignee.
Is There Anything Else You Need To Do?
If you die before your child repays a loan, your executor may be able to recall the loan back into your estate. Would this cause your child hardship? Is it better to forgive the debt in your will? Do you want the loan or gift to be taken into consideration when distributing your estate amongst your children so that they all receive an equal share? This is particularly important when you have given an “advance on the inheritance” to some but not all your children.
See Your Lawyer First
Before agreeing to help fund your children into a home it is important to discuss the pros and cons and the different options with your lawyer. We can help you make the right choices for your circumstances, and we can record the details of your agreement, minimising the risk of disputes in the future. For more information contact Shona Senior, Charles Mullins or Philip Sewell at Godfreys Law today on 03 366 7469.
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