Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 139

Take care when assisting parents financially

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 focusses 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:

Marital breakdown

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 ad hoc 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 dependant on one spouse and so on.

The paying of bills ad hoc 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.

Summary

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.

 

Melanie Palmer is a Partner of Palmers Legal. This article contains general information only and does not consider the personal circumstances of any individual. Professional advice should be obtained before taking any action.


 

Leave a Comment:

     

RELATED ARTICLES

Providing financial assistance to parents

Thou shalt not covet … thy neighbour’s house

Super alternative overcomes access and investment limits

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.