Parents often wish to help children purchase a home. In addition to concerns about the division of the financial assistance if the child’s marriage breaks down, the financial assistance creates other concerns involving fairness in estate planning, the loss of assets if there is a marriage breakdown, the exposure to creditor claims, and the potential future financial needs of the parents. This article discusses a solution which is effective in most circumstances.
The cost of a home is beyond the means of many young couples, and often parents want to help out with some financial contribution to the purchase. This is the point at which things can go seriously astray unless the situation is clearly thought out, and then properly documented. Fodder for future litigation and family conflict is sewn when funds are paid over with vague and ambiguous arrangements of the true intent of the arrangement.
When parents consider the risks, usually they focus on the consequences of a breakdown of the marriage. This is an obviously relevant concern, especially since the house will become the matrimonial home which attracts special treatment in Ontario family law. However, there are other potential concerns, such as: (i) the protection of the reasonable expectations of the other children in the parents’ estate; (ii) the potential for future impoverishment of the parents when they have been too generous with their largesse; and (iii) the unintentional exposure to claims of creditors of the child. The latter is very relevant if the child or his or her spouse is self-employed and has potential exposure for the liabilities of the business, for example, on a guarantee of a bank loan.
The obvious answer is to loan the money to the children, preferably secured by a mortgage on the new home, together a review of the parents’ wills to decide if the arrangements merit a change to the wills. It is very important that the loan be well documented with a formal promissory note, usually supported by a collateral mortgage registered on title.
A properly documented loan establishes the parents’ continuing claim to repayment as a legal obligation which becomes essential if there is a subsequent breakdown of the marriage, or financial circumstances turn against the parents and they need to recover some or all of the money for their own support.
The loan is also an asset of the parents’ estate, which can be dealt with directly or indirectly in their Wills in a way that should help to avoid potential conflicts among their children after their death. For example, it is common for parents to divide their estate among their children, with provision that if the loan continues to be outstanding at their death, its payment is applied against the share of the child who received the financial assistance.
The security of a mortgage significantly strengthens the parents’ position, and a mortgage is essential to establish priority against other creditors if the child later encounters financial difficulties. The existence of the mortgage also protects the parents against the possibility that the children may continue to borrow excessively against the house with, for example, a home equity line of credit.
Parents who really want to bullet-proof the loan and mortgage will require their married child and his or her spouse to obtain independent legal advice so that it can’t later be alleged that the loan was misrepresented to them, that they didn’t understand it, or that the loan documents were signed under coercion.
It is true that requiring proper loan documentation involves some modest cost and inconvenience, and perhaps even some embarrassment for some people, but an ounce of prevention is a pound of cure.
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