Parents Assisting Children Into Their First Homes – To Gift, Loan or Own?
Joe and Bianca had been married thirty years. They had two adult children, Mark who was 28 and Jenna who was 25. Mark had recently become engaged to Anna, his high school girlfriend and they were hoping to buy their first home. They had been saving hard, but like many young couples in 2022, couldn’t save quickly enough to match the rising market. They were also concerned about interest rates and where they might be heading. They both had their kiwisaver, which they were planning on using for their first home.
Joe and Bianca had started their married life in a modest home in the early nineties. Although even at the time the price they had paid for their first home had seemed like a big commitment, they recognised it was nothing like what their kids were going to have to pay for something equivalent. They remembered when they purchased an investment property in 2004 and Bianca couldn’t believe that they were paying three times the amount they had originally paid for their first home, simply for an investment property. However, both purchases and subsequent ones had paid off for them and now they were in their late ‘50s they had two investment properties as well as some money invested with a reputable managed funds company.
Bianca’s last surviving parent had unfortunately just passed away. Her parents had also done well from the property market over time and when they died, the basic house they had purchased on a quarter acre section in Takapuna in the ‘60s was worth a small fortune. Bianca felt that she and Joe were doing absolutely fine and decided to use some of her inheritance to help Mark and Anna (and Jenna in the future) into their first home.
Joe and Bianca’s friends gave them lots of advice as to how to structure the “Bank of Mum and Dad” advance. However, the idea that appealed the most to Bianca was taking a share in the property so that when the property was sold, she would take an increase in value in the property and would have at least grown the funds that she had been left. However, wisely she decided to go and take some legal advice from her and Joe’s lawyer.
Their lawyer explained that there were a number of ways of helping kids into property. The option of purchasing a share in the property, in theory, would work, but because of the bright-line test, if the property was sold within ten years, as the property wasn’t Bianca’s family home, any increase in value in her share would be taxable. Their lawyer said this was a trap that many parents had unwittingly fallen into. The other downside to taking a share on the title was that the bank was likely to require Bianca to be a co-borrower of the funds that Mark and Anna would be borrowing to purchase the property, and at the very least would require a guarantee from Bianca.
If Bianca did want to have an interest in the value of the property, their lawyer said another way of doing it may be a declaration of trust where even though Mark and Anna’s names would be on the title, they would sign a separate document saying that they were holding a percentage of the property for Bianca.
This did appeal to Bianca, but in the end, after mulling it over with Joe, she decided that as the money was a windfall to her, then it should really just be passed on to Mark and that she should keep no interest in the funds at all. It would simply be a gift from her (and really from her parents) to Mark.
However, while she loved Anna, she was mindful that she really did want Mark to benefit from the funds in the event that his and Anna’s relationship didn’t last the distance. She had a few friends whose husbands had taken half of their wives’ inheritance upon separation. Her lawyer recommended that she make the gift conditional upon Mark entering into a contracting out agreement with Anna, saying that in the event that they separated, Mark would not only get the money Bianca was gifting to him back but also any increase in value of the property proportionate to the gift.
In today’s world, it is very common for parents to help their children into property. There are a number of ways of doing this and this article does not canvas them all, but the important thing is to make sure that you get legal advice to make sure that you do it in a way that protects both you and your children.
If you feel you could use some specialist advice, don’t hesitate to contact the Trusts & Wealth Protection Team.
