Take care when assisting parents financially
By Melanie Palmer, Cuffelinks.
This article continues from Alex Denham’s, ‘Providing financial assistance to parents’, and is in response to a reader’s request to delve further into this little-explored theme. It focuses on what happens when circumstances change or where financial arrangements are challenged by other family members.
Parents are often giving a ‘leg up’ to their children, whether a gift to put a deposit on a house, guarantee a bank loan for a new business or the like. What happens if the ‘leg up’ is from the child to the parent, particularly in the event of marital or family breakdown? The following scenarios illustrate the main considerations:
Suppose a son has supported his parents by purchasing an investment property with them, and he has paid their bills and other essentials on an adhoc basis. The son’s marriage has broken down. Will his now ex-wife be able to make a ‘claim’ on the assets or money given to the son’s parents?
The answer is mixed. The issue in a marital breakdown is a division of assets based on a number of factors and largely depends on the facts of the marriage, such as length, earning capacity of each spouse, whether there are children of the marriage dependent on one spouse and so on.
The paying of bills adhoc in this scenario is unlikely to be included in calculating the ‘pool of assets’.
It is arguable that the investment property, as it is held as joint tenants, might not form part of the ‘pool of assets’. However, I am of the opinion it would be difficult if not impossible for the son’s share of the property not to be included in a calculation of the ‘pool of assets’.
This doesn’t give the wife a claim on the property however, when all the assets are being divided. I would be of the view that the value of the son’s share in the property would be included in calculating the pool and may affect how other assets, such as money held in bank accounts, are divided.
Changes among siblings’ own financial circumstances
Suppose three siblings purchase a property for their parents to live in. What happens if, due to loss of employment, one of the siblings stops making the mortgage payments, or one wishes to exit and be bought out?
To answer these questions, it is essential to examine the agreement when the siblings entered into this purchase.
Unfortunately, few people think about this at the time of purchase but they really should. There should be an agreement in writing and with each party obtaining proper and independent legal advice. This may sound unnecessary in family situations, but it is not uncommon for people’s circumstances to change through no fault of their own, leading to family discord.
As I often say to my clients, if everyone knows the rules beforehand, then disputes later are minimised or avoided all together.
So the answer to these questions will depend on the agreement in place. If nothing is in writing, then what was discussed before the property was purchased cannot be verified. If no discussions were had, then it’s an even bigger mess.
Essentially, if there is a mortgage over the property then all owners will have agreed to be liable for the mortgage, usually jointly and severally, and one or all are liable. So if some siblings aren’t paying the mortgage then the other siblings will need to make up the difference. If the mortgage goes into default, it will affect all of the sibling’s credit rating.
If one sibling wishes to exit the situation, then usually the other siblings will buy their share. It is usually based on a market value of the property at the time of the sale and requires the agreement of all owners.
Can they sell to someone else? Yes, but only with the consent of the other owners. If there is a mortgage, then the mortgagee’s consent will be required as well.
If agreement cannot be reached, then I see little choice but for the property to be sold and the proceeds divided amongst the siblings. The obvious problem is that mum and dad will be homeless.
Planning at the beginning is the key to avoiding headaches and arguments at a later date.
Unequal contributions within the family and inheritance
Another common issue is where one child helps the parents out more financially than the other children. On death, one child may feel entitled to more of the estate. This feeling of entitlement however, is not entirely accurate when it comes to administering the estate.
The parents’ will should largely address these issues. If the child gave money to the parent, then that is a nice gesture, but it was a gift. It is not intended to be repaid by that child inheriting a larger portion of the estate.
If it’s a loan, then the loan should be in writing before death and be reflected in the parents’ will, recording that the estate will repay the loan.
A parent may leave a larger portion to one child over another to reflect the contributions made before death, but this situation usually causes more trouble than it is worth. It is likely that unless there was careful discussion and agreement before death, a claim on the estate by the child with the smaller portion will eventuate, which will lead to unnecessary stress and legal fees.
I again would say planning is the key with prior agreement as to what the money means and whether it will be ‘repaid’ by the estate of the parents.
If property is involved, then the child’s investment or loan to the parents should be reflected in the ownership. For instance, where the child owns a share of the property or there is a mortgage granted over the property in favour of the child, the death of the parents will not affect that child’s investment.
In the absence of documentation to outline the situation, in my view, the money will be treated as a ‘gift’ and recovery from the estate would be difficult if not impossible.
Not all situations are straightforward and each matter will be determined on the facts. Documents outlining the intention and agreement of all parties may seem unnecessary when family is involved, however, courts are full of family members fighting about money.
If everyone knows their obligations and rights from the beginning, in my experience, most disputes are quickly resolved, or avoided all together.