Is it a loan? Is it a gift? No it’s a possible nightmare!
The apparent housing affordability crisis that is regularly talked about in the media and at backyard barbeques has led to a shift in the way some young people are funding the purchase of their first, or in some cases second or third house and it generally involves parents helping out. While parents assisting children to buy a house is not a bad thing, and in some cases is an excellent way of dealing with family business succession dilemmas impacting on estate planning, problems can arise if not enough thought is put into the precise nature of the arrangement.
I have been in numerous estate planning meetings when parents have mentioned that they helped one of their children purchase a house. When I ask “was that a loan or a gift?” the answer is often “we are not sure, we didn’t think about it, we just gave him/her the money”.
When I ask “have you helped any of your other children?” The answer is sometimes “yes, but the amounts were different” and sometimes “no”. When I ask “do your other children know that you have helped one of their siblings purchase their house?”. Again, the answer is sometimes “yes” and sometimes“no”.
Most couples with children make wills that leave everything to each other and then everything to the children equally when the second parent dies. If parents simply advance money to one of their children without doing anything else, including reviewing their wills, there is confusion about what happens to the advance when the second parent dies? Does the advance have to be repaid to the estate or not? Without evidence to the contrary, the advance would be viewed as a gift under the legal principle known as the presumption of advancement. So, the child receiving help to buy their house would still receive an equal share of their parent’s estate.
There are a number of ways parents can assist children to purchase a house including:
• an outright gift
• making a loan
• buying the property jointly
• buying the property in the parents’ names
• parents guaranteeing a loan obtained by the child
All of these options can result in significant unforeseen consequences if the transaction is not properly thought through and risk assessed before it is entered into and if issues such as estate planning for the parents and the child; the death of the child; the incapacity of the child; the bankruptcy of the child or the separation or divorce of the child are not considered in advance.
At DDCS Lawyers we can help you help your family by providing advice on how to best structure arrangements between parents and their children to assist with purchasing a home so as to provide certainty and minimise the risk of unhappiness and adverse consequences when circumstances change.