The busy spring wedding season is upon us. For a lot of parents, that means giving your kids cash to buy a home. But before you open up your wallet, there are things you can do to protect yourself if the marriage doesn’t work out.
Recent data, from Mortgage Professionals Canada, show down payment gifts from parents doubled on homes bought in 2014 and 2016 compared to 2000.
Shulman Law Firm’s Rick Peticca suggests a legally-binding marriage contract that keeps an inheritance, or gift, on one side of the family.
“It may create bad feelings at first, but you take the elephant out of the room, and detail that the money gift is expressly given to your son or daughter,” said Pettica.
“It’s like an insurance policy you hope you never have to use.”
Peticca says a written contract is more valuable than a verbal one because an agreement on paper has a much better chance of holding up in court.
“Even if your son or daughter is getting married without a formal pre-nuptial agreement or marriage contract, as long as the financial gift for a down payment is correctly set up, it can be formally negotiated and registered as a secured loan, which can be forgiven by the parents as long as their offspring remains happily married,” he said.
“That way, if the couple does split up, the lenders can ask that it be repaid, and the loan would not be considered divisible as part of the family property.”
Pettica says there are a few points that courts will consider when trying to determine if the money was a gift or a loan: Are there any documents created prior to or following the marriage to show the money was intended to be a loan? Are repayment details specified, such as how much per month or per year? Is there any security held by the parents in connection with the loan? Has there been any demand by the parents for repayment before the couple separated?
Is there any stated expectation or likelihood of repayment?
There are ways to keep the dirty laundry out of the courts altogether. Pettica says gifts in the form of bank accounts and investments should be kept in separate accounts outside of the joint matrimonial home. Generally, assets either person brings to a marriage are not subject to division upon divorce.
Parents can also set up a trust that specifies how the property is used, including who gets control of it in the event of a divorce.
Think it through
Legal ramifications aside, as parents you need to be sure your generosity won’t damage your own finances and credit. It’s also important to be clear about the terms.
The newlyweds need to understand all the costs of home ownership on top of paying a mortgage.
“A budget indicating cash flow is helpful in determining if they demonstrate discipline to service all the costs,” said Meridian’s Jason Davenport.
If the couple can’t keep up with mortgage payments, you will have to pay if you are part of the mortgage application. It’s important to understand the difference between a co-signer vs. a guarantor.
“Guarantor may seem to be back up for the borrower, but actually can be required to pay first. And the guarantor is not on title,” said Davenport.
“Essentially a guarantor can be called upon to make payments for the mortgage should the title holders not be able to/refuse do so, where are a co-signer is 100% responsible for the property as much as every other party on the title.”
If you have the decision to go ahead, there are tax advantages to giving your kids a cash gift now.
“By gifting money to your children now, you suffer the tax consequences of that now, whatever they may be, vs. your estate suffering them later,” said Davenport.
“Usually, an estates taxation is much worse, so if you are thinking of reducing the taxable implications of your estate, often organizing to gift the money to your kids now is a great way to do so.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains