Thinking of Giving Your Children a House Deposit?
We are told that our kids will come to parents with begging bowls in the hope that their parents’ will bail them out for a house deposit.
Many will tell you this has all to do with the consumption of lunches and breakfasts of avocado and toast and wild irresponsible living. But I am not so sure. You would have to consume a crapload of avocado and bake a crapload of bread before you go through an entire house deposit.
No. This is because the rate of house price rises, and wage inflation are not precisely what you call synced. This means house prices are like a runaway express train, and wage rises are as slow as a tortoise.
Don’t get me wrong. Wage rises are good, but compared to house prices, they are crap. This means that banks want more extensive deposits before they lend, forcing children to knock on parents’ doors.
Parents especially those from India are deemed as mean and cruel if they do not support their children and give them their hard-earned savings. If you have one child giving your child a sizeable pot of money may be doable. If you have 3 children, it might be a bit hard.
But I look at house prices and think we live in an insane world—and I bet you do, too. So much so that despite setting up my kids for the financial future, I think it is only a matter of time before both my kids come to me with a begging bowl.
At the time, I hope I do not listen to my wife, who is as sentimental as any mother, and I hope I do not listen to whatever is left of my heart either. I hope and pray that I listen only to my brain and do what I tell all my clients to do when they ask me for advice about giving kids their money.
Why do I say this? Well, we become gooey like a warm chocolate dessert when it comes to our kids. Logic goes out of the window, and we become governed by our hearts when logic is needed.
That is because I am finding that all those warm and gooey parents have worked out that warm and gooey does not work for them and now need to move to something stiffer.
This is not because their children have become nasty, run away with money, or even refused to pay it back. In many cases, your kid will not be the problem. It could be their partners.
Because of this, many lawyers become involved. When that happens, you could be throwing not just a deposit but a chunk of money at legal fees as well.
When kids come to their parents with a begging bowl and ask for money, parents tend to give it. There is rarely a discussion of gifts or loans, and there is almost no chance that any of it is put on paper.
Generally, I will always tell clients that if their child asks for money, they should document it as a loan, even if they do not intend ask for it back.
The problem is that many will not follow this advice. Why? That is because parents become emotional when it comes to their children.
I say this because once money is given without paperwork, it is hard to get back. If you want it back, you must go to court (hence the many lawyers), and it is likely that in court, it will be deemed a gift. If it is deemed a gift, there is a chance you may have donated the money not to your child but to someone you may not actually like.
I know what you are thinking. When would that happen?
Well, picture this.
Your son is lovely and decides to marry an equally lovely girl. They are so adorable that you are 100% in favour of their marriage. Soon after, they come to you for a house loan. And because they are so lovely, you give them $100,000.
A few years pass, and 2 equally lovely grandchildren are born.
Unknown to you, the couple started having problems and decided to divorce.
You now decide that you would like your $100,000 back. But your ‘now not so loverly daughter-in-law’ argues it was a gift, and you try to argue it was a loan. Your son backs you up on this, too.
So, in court, the judge will ask the logical questions: If it was a loan, where is the loan documentation? Are there any emails suggesting it was a loan? Has interest been paid?
Without this, the judge would conclude that the amount was a gift and that gifts cannot be claimed back. And this ultimately means you have gifted your not-so-lovely, soon-to-be-ex-daughter-in-law a minimum of 60% as she also has custody and needs to look after the grandchildren. It is entirely possible that your ex-daughter-in-law gets the house, and your son ends up living with you again with you being $100,000 poorer. This is exactly what happened to one of my clients, so do not think it will not happen.
However, this does not only apply to giving money to purchase a home. We often see it in succession plans where parents consider passing down their business. If shares in the business are gifted to the child who subsequently splits from their partner, the business ownership could be divided, too.
My prediction is that as more kids come to their parents for a handout, more parents will get caught out. If you don’t want to get caught out do the logical thing and arrange some loan documentation.
Written by Hitesh Mohanlal, Chartered Accountant
