Increasing house prices have seen many parents helping their children to get into their first home. Giving such help is not without risk especially if the child has a spouse or de facto partner or later marries or enters into a de facto relationship.
Typically, parents help their child out with getting together a 20% deposit (required in most cases under Reserve Bank rules) with the balance borrowed from a bank or other lending institution. So, for example, if the child is buying their first home for, say $500,000.00, has savings of $50,000.00 with their parents offering to put in $50,000.00 then the bank will expect the $50,000.00 from the parents to be a “gift” to the child. This is all very well but the gift may be at risk from claims under the Property (Relationships) Act 1976.
If, after buying the house by themself, the child marries or enters into a de facto relationship and the house becomes the family home then, if the child and their spouse or partner separate, the house forms part of the relationship property and divided equally, if the relationship has lasted more than three years, or, in some circumstances, if there are children of the relationship.
Alternatively, if the child is buying the house with a spouse or de facto partner then the gift to the child will, in effect, be a gift to the child and their spouse or de facto partner. This is because if the child and their spouse or de facto partner separate then the family home forms part of the relationship property which is divided 50/50 on separation if the relationship has lasted more than three years, or, in some circumstances, if there are children of the relationship.
How are parents to deal with this risk?
In the past lawyers would have recommended that the parents and their child or child and spouse or de facto partner enter into a loan agreement or deed of acknowledgment of debt so that the funds provided by the parents was a loan and repayment could be demanded if the child and their spouse or partner separated. However, this is not usually acceptable to the bank if the funds provided by the parents form part of the 20% deposit.
Today, the best way to ensure that such a gift to a child does not become a gift to the child and their spouse or de facto partner is to ensure that the child and their spouse or de facto partner enter into an agreement under section 21 of the Property (Relationships) Act 1976. It is best to have the child and their spouse or de facto partner to enter into a section 21 agreement before they marry or start living together or before they purchase a house together. To be legally binding and effective a section 21 agreement must be in writing and each party must have independent legal advice from a lawyer who witnesses their signature on the agreement and signs a certificate confirming that they have advised the relevant party on the agreement. Completing such an agreement involves some expense and takes some effort but, as house prices rises and parents increasingly help their children into their first homes it may be a small price to pay for the protection that it provides.
If you are planning on helping a child (with or without a spouse or partner) then we suggest that you get legal advice well before any money is paid over. Some parents have found that a gift to a child is also a gift to the child’s former spouse or de facto partner.
If you need assistance or advice regarding relationship property then please contact one of our lawyers, Michael Fennessy or Melissa Bourke at our Palmerston North office or Peter Lindstrom at our Pahiatua office.
Article written by Michael Fennessy.