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Parents ... Is your house deposit a gift or a loan?

17 May 2019

Are your parent’s lending you money to buy your first home?  Or, are you giving your children and their partners money for their deposit?  You need to consider:  is this money a gift or a loan?

Everyone involved may think they are clear on the arrangements at the time, however, when a relationship breaks up written evidence is needed.

For example, Jack and Jill give their son Bill $50,000 to buy a house. After buying the house Bill starts living with Sue. Their relationship goes over three years and Sue now has a claim to a 50% share of Bill’s house including the $50,000 given to him from Jack and Jill.

There are a couple of steps Jack and Jill could take prior to handing over the money to Bill to ensure it’s used for its intended purpose:

  1. If the money was a loan to Bill: 

A Loan Agreement should be entered into between Jack and Jill and Bill. This document will record the debt and give Jack and Jill the right to enforce the debt.

If Jack and Jill wish to secure the debt they can register their names on the title to the property as owning a share.

This will prevent Sue getting a share of this $50,000 if she and Bill live together in the house for more than 3 years and she claims a half share of the house at separation.

  1. If the money was a gift to Bill:

In these circumstances the $50,000 would be included in any claim from Sue for a share of the house. To prevent Sue getting half of the $50,000 if they separate, Bill should get Sue to sign a contracting out agreement which keeps the $50,000 as Bill’s separate property.

In a Contracting Out Agreement, Bill and Sue can record which assets and property they wish to keep as their separate property and which property they will share in the event that they separate or one of them dies. The Agreement will give Bill the option to record the $50,000 inheritance and the house as his separate property.

If Jack, Jill, Bill and Sue do not have a signed legal document to show whether the money was a gift or a loan, it’s difficult to prove what it was. If these documents are not prepared, signed and witnessed properly they are not enforceable and major questions can arise such as:

  • Who owns the property;
  • Does a spouse have a claim to money advanced by parents;
  • Was money intended to be a gift or was it to be repaid.

 

If a dispute cannot be resolved it can end up in the Family Court which is time-consuming and expensive for all involved.

You should always obtain legal advice before entering into one of these transactions to make sure that all parties are on the same page. Each party should seek their own independent legal advice as other matters will need to be considered, such as documenting the advance/debt in your Will.

Circumstances can change and you should make sure your intentions are clear to avoid falling out with family over money.

 

Gillian Spry is a Consultant in the Family Disputes Team at Norris Ward McKinnon. You can contact Gillian at gillian.spry@nwm.co.nz