Pitfalls: Helping out your children…

Many clients these days want to provide assistance to their children to purchase property. However, there a few issues to consider.


Scenario One… Rob and Kirsty

Scenario: Rob and Kirsty have three adult children. The eldest, Nicky, is married and has asked for help with a deposit in order to buy a home.

What’s the issue? If Rob and Kirsty help Nicky, what happens if she divorces? Her husband could claim it’s a gift to them both and end up with a portion of it as part of the divorce settlement.

Solutions: Rob and Kirsty can provide the money as a loan, with a loan agreement drawn up so that the loan can be called up at any time (e.g., if Nicky and her husband break-up). They also should put a (second) mortgage over the property (the bank may have the first mortgage) so that if it is sold, they must be repaid.


Scenario Two… catering for other possibilities

Scenario: Rob and Kirsty are having their Wills drawn up.

What’s the issue? If they were to die prematurely, they want to make sure all three children have been looked after equally.

Solutions: Kirsty and Rob can have their Wills drafted so that Nicky has the loan forgiven as part of her inheritance, with the other two children receiving a greater share from the estate, such that the end result is each child has received an equal amount.


Scenario Three… not enough?

Scenario: Rob and Kirsty realise they may not have enough left in their estate to ensure the other two children receive an equal share.

What’s the issue? If Nicky’s loan is forgiven the executor may not be able to honour Rob and Kirsty’s wishes and give the other two children enough to equalise the sums received.

Solutions: These clients could take out life insurance to cover the difference, or could have a clause in the Will such that Nicky must pay her siblings a sum, over time, so that the amount everyone receives is equalised.