To Gift, or to Loan?
As mentioned in our previous Trusts article "Assisting children with buying property", New Zealand's rising property prices has made it very difficult for first-time home buyers to enter the market. As a result many parents are looking for ways to help their children get into property.
Gifting money was highlighted as one of the four main means of assistance chosen by parents wishing to help their child (and their partner). Although there are many benefits of gifting, one thing that many parents do not consider is what would happen to the property if the couple were to unfortunately divorce.
Outlined below is a scenario where this had not been considered, resulting in a few issues for both the parents and their child.
John, Judy, Sarah (& Tom):
John and Judy had done well over the years. They had worked hard, started their own business, paid off debt and were now looking forward to their retirement. They only had one child, a daughter, Sarah, who they adored. Sarah was happily married to Tom. Back in 2006, at the time of selling their business, John and Judy thought it would be nice to help Sarah and Tom out. The house market had gone through the roof and, to John and Judy, it seemed that things were a lot tougher for young people these days than when they were starting out.
Sarah and Tom had been fortunate enough to get their feet on the property ladder. However, now that Sarah was pregnant with their second child and wasn’t planning on going back to work, their mortgage payments were going to be a lot harder to meet. John and Judy decided to give Sarah and Tom $200,000 to help alleviate the pressures of their mortgage. The funds were in their family trust, and as Sarah was a beneficiary of the trust, their co-trustee agreed that they would make the $200,000 a gift rather than a loan, as there wasn’t an expectation that the amount would be re-paid. Sarah and Tom were thrilled.
Unfortunately, towards the end of last year, Sarah told John and Judy that she and Tom had agreed to separate. Things hadn’t been very good for a while, and it was an amicable split. However, as is often the case, things were amicable until it came to the separation of assets. Sarah argued that the $200,000 received from her parents’ trust six years ago should be paid to her and that Tom should not receive half of that amount. Tom said that the $200,000 was a gift to both Sarah and Tom, that it had been intermingled with their relationship property and so he was entitled to half.
Unfortunately for Sarah and John and Judy, Tom’s lawyer was right. Even though the money had come from John and Judy’s trust, it had been paid to Sarah and Tom. They had used it to pay off a joint mortgage on their family home. At the time of making the gift, John and Judy should have sought advice from their lawyer who would have advised them that they should have made a loan to Sarah and Tom. Then when the house was sold, that loan would have had to be paid back, Sarah and Tom would have split the balance of the proceeds and the trust could have re-advanced the $200,000 to Sarah at another stage.
If you feel you could use some specialist advice, don’t hesitate to contact the Trusts & Wealth Protection Team.
