Parents who want to help their children out financially – for example, by helping them buy a home – should make sure they get the legals right, or risk things going wrong later
If you’re helping your child out financially it’s crucial to be clear whether it’s a gift, so you don’t expect the money back, or a loan, which you expect them to repay. If it’s a loan, the terms of that loan should also be spelt out. For example, should they pay interest and at what rate, and when should the loan be repaid?
It’s not wise to agree things orally, or to leave things vague. Parents often assume that, because it’s their own child they’re dealing with rather than a third party, they’re all acting on the same assumptions. Or that, if a dispute crops up, it can be sorted out at the time in a friendly way. But it can later turn out that memories differ about what was agreed, that your underlying assumptions weren’t shared by your kids or that they turn out to be more unreasonable in sorting out problems than you thought they would.
If your child is using money from you to help buy a home and you expect to have some sort of stake in it – it’s an investment in the property, not a gift – it’s even more important to put things in writing. In one extreme case parents sold up and put their money into a pot for their sons. The sons used it to buy a house, and the parents moved into the basement. The sons later decided to sell the property and the parents asked for their money back from the proceeds – but the sons argued the money from their parents was intended to be a gift. There was no formal paperwork for the parents to rely on and the court ended up splitting the sale proceeds half and half between the sons, leaving the parents with nothing.
Clarifying what the status of the money is, and your interest in any property bought with it, is particularly important if your child is married or in a civil partnership. If the money was intended to be a loan or investment, but you can’t prove it, and they split up, you risk not getting your money back – your money could even end up being handed over to your child’s ex.
Also think about what you want to happen if you have more than one child, and you’ve helped one of them out during your life, but not the others. When you die, should an equivalent amount be knocked off their share of your estate (what you leave behind)? If it’s not clear from your Will, there’s a risk a nasty dispute could develop.
The message is clear – when providing money to your children you need to agree with them whether it’s a gift or a loan/investment, think through the legal implications and write down what you’ve agreed, clearly and unambiguously.
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