Divorcing from the Bank of Mum and Dad

COMMENT: It is no secret that house prices are skyrocketing. It is becoming increasingly difficult for young people in New Zealand to get on the property ladder. As a result, those with wealthy parents are looking to “the bank of mum and dad” for some help.

While this generosity will initially be great for any couple hoping to buy a home, it can create significant complications down the track if the couple separates.

Gift or loan

Parents who offer to help their children purchase property should clearly document whether the money is a gift or a loan. Parents may be excited to be involved in the purchase of their child’s first home. In the excitement, they do not seek legal advice or formally document the agreement.

If the child’s relationship ends and the house is sold, parents will often try to get their money back. They then get a rude shock when their child’s partner claims the money was a gift and therefore part of the relationship property pool. Without proper documentation, parents will spend significant time and money trying to prove that they intended that the money advanced was a loan.

What happens if things go wrong?

If there is a dispute as to whether the money was a gift or a loan, it will be up to the parents to prove they intended the money to be a loan at the time they advanced the money. If the parties cannot reach an agreement, they may have to apply to the Family Court to settle the dispute.

In the Family Court, the case would be heard by a Judge over one or more days. The Judge would hear evidence from both parties and decide who the money belongs to. It can take more than 12 months to get a hearing in the Court. There will also likely be significant legal fees involved.

How can parents protect themselves?

1. Record of intention

Documentation at the time of the advancement is very important. In any dispute about whether money was a gift or a loan, the intention of the person advancing the money is the determining factor. Although the relationship between you and your child’s partner may be strong, it is best to prepare in case that relationship turns sour. Ensure any agreements you reach are recorded in writing. This could be a simple as an email recording what was agreed in a verbal conversation.

Parents should get independent legal advice on the implications of contributing money towards the property. The lawyer could also draw up a formal legal agreement that includes any terms of the loan, that includes when it may be paid back.

2. Pre-nuptial agreement

Parents should also suggest that their child enter into a pre-nuptial agreement with their partner. A pre-nuptial agreement records how the couple’s property would be divided if they separated. In the agreement, the couple can agree what is relationship property and what is not. The parents’ contribution to their child’s home can be ring-fenced so that it does not comprise part of the relationship property pool if the relationship ends.

3. Deed of acknowledgment of debt

Parents could also enter a deed of acknowledgment of debt with their child. This is essentially a cash loan agreement between the child and their parents that does not accrue interest and is only repayable on the sale of the house. A deed of debt can require payment on demand or payment on conditions, such as if their child’s relationship ends. One benefit of this arrangement is that the child’s partner is not a party to the agreement. Pre-nuptial agreements can be challenged if the circumstances of the couple have significantly changed since it was created. That is not the case for a deed of acknowledgement of debt. However, parents will only be able to recover the initial deposit amount. They will not be entitled to any increase in the value of the home. A deed of acknowledgement of debt requires the parties to have independent legal advice.

4. Residential care

Parents will need to be mindful that a significant gift to their child can affect their eligibility for the Government’s residential care subsidy. Any person who applies for the subsidy must have a financial means assessment from Work and Income. As part of that assessment, the Government will consider whether the person (or their spouse) has provided an “extraordinary gift” to anyone. Significant contributions towards the purchase of a home may be considered extraordinary gifting and therefore impact the parents’ eligibility for the residential care subsidy.

Helping your child onto the property ladder can be a rewarding experience but it does come at a risk. No matter how strong your relationship is with your child and their partner, ensure any agreement is well documented and obtain legal advice to avoid serious complications in the future.

- Jeremy Sutton is a senior family lawyer, specialising in divorce cases where there are significant assets, including family trusts and complex business structures.