How to be the best ʻMum and Dad’ bank
With most major banks starting to tighten their lending criteria, loan approval from the ‘Bank of Mum and Dad’ are on the up, as mums and dads just try to get their children on the property ladder (despite it currently slipping down).
It is timely to remind those thinking of helping out the children of some of the implications. Before you even consider helping out your child/children there is one vital question. Can you do for all what you plan to do for one? Perhaps it is best to consider your family planning and stick to one child, rather than raising a football team.
You may be tempted to give your loved ones all you can but sometimes you need to say NO! Especially if it is going to be at the cost of your health or retirement plans. If the amount of money they need from you to bridge the gap is too big help them put things in place to make it smaller. Maybe now is not the right time. Perhaps there needs to be a refocus on debt management (existing car/other loans). Once that decision is made it is time to review the options.
What about putting the new property in a Family Trust?
Not yours, just don't do it! This is their home and unless you are going to be the landlord just don't. In addition this will likely result in issues around Brightline tax, any exemptions are only available to the principal settlor. The principal settlor is the person who has settled (put in) the most amount of money into the trust. I expect this will not be the kids.
Family Trust; Theirs: While a great option for future proofing things it needs to be balanced with the above in any amounts lent and structured. Unless there are other reasons, now might not be the time to form a trust (although most advisors would love to form a Trust for you and take your money, even if it's not really needed).
Joint ownership (Mum, Dad, Kids): This poses its own issues around Brightline tax and Ownership. Unless you feel like being put on the mortgage and being left holding the ball should unforeseen circumstances arise. This is generally frowned upon in most circumstances, you normally end up with all the negatives and few of the positives.
Let’s keep it simple then, no fancy structures: Kid’s name on the title, bank lending for the bulk of the funding and a top up loan from the Bank of Mum and Dad for the shortfall as a loan ranked behind the bank but before the children.
Establish the loan to them properly with a signed acknowledgement of debt. If you simply transfer them the funds, how will you ever prove whether it was a loan or a gift? And this is your chance to ensure you are paid back before any disgruntled ex-partners take your darling child to the cleaner and ruin everything.
Be careful about any interest charged on the loan as this will create taxable income to the parents. In addition there can be Resident Withholding Tax implications based on the amounts involved. You may need to seek guidance here to ensure things are in line with legislation.
So now with the funding secured, it is time to go house hunting. For the kids, not you. As exciting as it can be, don't spoil this special time, let the children go on the journey, you can always give gentle guidance, but if you hover too much it is only going to create resentment.
In the end it’s their home, you are not on the title, the kids are, let them nurture their nest egg and remind them that as they give love and care to their house, the value is theirs to reap and enjoy if properly maintained.
Never guarantee debt, normally you should give a separate loan to top up. With you not guarantee the original bank lending they must be responsible for their mortgage, it is part of life's learning to manage things and grow up into the world. You need to protect your own home and lifestyle should things go south.
Financial Security
Seeing your kids off and away on their own property journey can be rewarding, Just don't jeopardise this if you can't afford it. Take legal and accounting advice for two reasons:
- it is always good to dot the i’s and cross the t’s; and
- Accounting advice is normally like a bottle of wine. What is good today may not be appropriate next week and things have definitely changed over the past 12 months.
HAVE WE GOT YOU THINKING?
Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz
Keep an eye out for September’s article!