Financing your children’s property purchase

Many of us wish to assist our children in the purchase of their first home, or an investment property.  Some of us are able to contribute all or part of the deposit, and others are able to contribute substantially more.

The question often arises as to what form this assistance should take, and particularly whether it might be regretted in the future, if the child goes through a divorce or bankruptcy.  The danger in those cases is that the money which you have contributed ends up in the hands of a third party.  In the case of divorce (or breakdown of a de facto relationship), the concern is that, after a breakdown in that relationship, the partner or spouse will walk away with part of the money you have contributed.  In the case of your child experiencing bankruptcy (for example through failed investments or a business failure), the concern is that his or her creditors end up benefiting from the money which you have provided.

There a number of ways to structure your contribution:

• As an outright gift: this provides no protection in any of the above circumstances;
• By way of a loan: this may be interest free or provide for payment of interest (either regularly or on repayment; or only if called for).  This enables you to recall the money if your child experiences any of the above circumstances.  If secured by a registered mortgage, it may also be sufficient to protect that money completely in the event of a bankruptcy.
• You purchase the property or part of it in your name: this provides complete protection against the above circumstances, but has taxation and land tax disadvantages, and also reduces the flexibility available to your child.

A parent who is in receipt of Centrelink pensions or benefits should carefully investigate the implications of their Centrelink entitlements before entering into any of these arrangements.  In all cases, taxation advice should be obtained also.

Whenever assisting a child in this manner, it is essential to review your estate planning with an experienced estate planning lawyer.  Of particular importance are:

• Your intentions as to how your contribution to that child’s property purchase is to be treated on your death;
• For example, do you intend that:
  • The loan be repaid to your estate?
  • The gift or loan be deducted from that child’s share in your estate as part of his or her distribution?
  • If you purchase the property or an interest in it, the property (or your interest in the property) passes to that child under your will?

It is essential to have proper legal documents drawn up when contributing to a child’s purchase of a property.  This is the only way to ensure that there are no unexpected consequences for either party, and to prevent inter-family disputes.  Home drawn agreements and records, (or failure to record anything at all,) are a sure fire way to create future problems and disputes.