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In recent years there has been an upsurge of the circumstances where more than one generation of a family has a financial stake in the same property. Until recently, with high property prices, we often saw Mum and Dad helping out with the first home purchase deposit for their off-spring or providing some collateral security for the necessary large mortgage. In recent months there has been a noticeable increase in families coming to the rescue in mortgagee sale situations. Some parents have decided they will “advance” the expected inheritance to their children now, to ensure that a roof is kept over the head of the grandkids.
Although it is heart warming to see family members helping each other out in so many different ways, all these arrangements have one thing in common. They need to be carefully thought through and properly recorded before any money or property is committed.
Where you are contributing a significant amount of money to any property dealing, the first question to be decided is whether you are making a loan or a gift. Either way, the transaction needs to be recorded and signed by the parties involved. If there is a dispute years later, even after your death, a written agreement will be the best evidence of what was intended. If a gift is intended then the necessary papers to deal with gift duty implications will be required. If you are giving or lending to a child with a spouse or partner, what happens if their relationship comes to an end? You might be happy to see your child retain the money as a gift but would you like to see half of it effectively disappear with the departing non-relative ex-partner? The couple you are helping out may need to have a property relationship agreement drawn up to cover their position.
Where you are making a large sum of money available you might wish to consider whether having an ownership share in the property is a good idea. There is much more protection and control if your name is on the land title. This approach should give you better protection if the family member you are assisting does not have a good track record in managing their finances. If your name is on the title, you must be consulted before the property can be sold or further mortgaged. Any legal proceedings affecting the property will be served on you. You will know what is going on. (It is technically possible to separately mortgage only a part share in a property but this is not very common.)
A proper legal agreement should record the payment of the money and clearly establish any occupation rights that result from the payment. Who is responsible for making mortgage and other payments (share of rates, utilities, repairs etc) and how the money advanced is to be dealt with in the long term, if the property is sold, also needs to be recorded. There may need to be provisions for valuing individual interests and giving options to purchase the shares of owners who wish to leave the property. A carefully thought out exit strategy is as important as the initial purchase arrangements.
Parents investing large sums of money in a property venture with only some of their children need to be aware of how this will affect their entire estate when they die. Will their other children be unfairly disadvantaged? Updating wills to treat all the children fairly may be necessary while informing the other children of what is going on may avoid disputes and grievances later.
Individuals’ needs change over time. People grow older, die, separate, divorce, change their minds and fall in and out of love. When many thousands of dollars are tied up in a joint property venture, even with close relatives, all those “what if” questions need to be considered at the outset to avoid future headaches. Independent legal advice for the different parties involved will often be advisable.
Disclaimer: This information is of a general and summarised nature only. It should not be used as a substitute for obtaining personal legal advice.
Terry welcomes feedback and comments and can be contacted through his website www.alibipress.co.nz.