Helping Your Children into Properties - Part 1

From a trustee’s perspective I want to raise the issue with you of parents helping their children into houses. As trustees, advisers, accountants, lawyers or whatever your role may be we all get involved in these discussions. We also have the same issues in our own families. So, what are the options that we have when children are trying to buy a house. Obviously, they might do it on their own or they might do it with their partner.

The first option is obviously for the parents either individually or through the trust to loan funds to the child. The problem with this is that some banks will treat that loan as part of the borrowing against the property and take it into account for the LVR ratio. As a result the bank will lend less and the loan from Mum and Dad or the trust doesn’t count as part of the equity in the house purchase. This is particularly the case if you deal with some of the smaller banks and some of the secondary financiers. So sometimes Option 1 simply doesn’t fly.

The second option is that Mum and Dad or the trust can make a gift or a capital distribution to the child or a trust as the case may be. The problem with this is that’s all well and good but what happens in the future if that child is in a relationship and that relationship fails. How do you protect for that? The only way that we would allow that to occur would be if there was a relationship property agreement between that child and their partner or spouse acknowledging that that part of the funds represented separate property either as a nominal sum not inflation adjusted or alternatively as a part ownership of the house. It could be done on either basis.

If we were a trustee, we would not allow those funds to be loaned out of the trust or distributed without that relationship property agreement pre-nup being put in place. Now the pre-nup doesn’t need to deal with all assets it just needs to deal with those moneys. This is a viable option and we have done that in a number of cases.

Option 3 is for the trust or Mum and Dad to take an equity stake in the house that will be recorded on the title. You should consider setting up a co-ownership agreement around that for the future. The real problem we now have is that if it is a new build, you will have a 5 year Brightline period for Mum and Dad or the trust or if it’s an existing property a 10 year period so that part ownership of the property by Mum and Dad or the trust is going to be subject to the Brightline Rules. Mum and dad can’t even gift that part ownership to the child within the brightline period.

The other area you have got to be very careful about is where we have a trust acquiring the property for the child or children and their spouse. The reason for that is the Brightline exemption applies where the home is used by the principal settlor of the trust. The settlor is obviously the person named on the deed as the person putting money in, but under tax law, the settlor can also be persons gifting money to it, the settlor of a trust that distributes money to that trust, or someone even loaning money to that trust. If Mum and Dad have loaned money or distributed money from a trust or personally then of course they may be settlors but if their relative contribution from a settlor settlement viewpoint is more then of course they could be deemed to be the principal settlors and not the children. This is a point you must be very careful about to work around the Brightline rules.

Overall, the biggest concern that I have when I am an advisor or a trustee in this area is to make sure that Mum and Dad can afford to loan those funds or gift those funds to the child. How is it going to impact on Mum and Dad’s future? We see this not only in relation to buying a home but kids going into business. Mum and Dad might have the squeeze put on them by the child to make an investment in their business or loan some money to start a business. You have got to assume that that money is not going to come back because that is the worst scenario and if that is the case how will Mum and Dad fare? In some cases, I have seen Mum and Dad’s home sold up because a mortgage was taken over it to support a child’s business. You have to be very careful particularly if there is a mortgage there if the Mum and Dad are guarantor or the trust, the bank does not have an obligation to necessarily tell you if they are loaning further funds. Be very careful to understand how the banking arrangements work as well.

This is a difficult and emotive area, firstly we have got to decide whether parents can help their children be it directly or through trusts, then we have got to decide how to do it.

In Part 2 of Helping Your Children into Properties I will address the next problem in line which is how do you maintain an equitable treatment between your children. Johnny or Mary might buy houses many years apart so how are you going to maintain that equity?

If this is an area you need help with or would like to discuss your options please use the form below to send us a message.