Thinking of advancing money to your children to assist with a house purchase?

by Maretta Twentyman & Debbie Dunbar - Morrison Kent

It is common for parents to help their children get on the property ladder by advancing them money to assist with a house purchase. This transaction can be structured in a number of different ways, but is frequently done as a gift. If this is something you are considering, you need to be aware of the potential consequences under relationship property laws if your child later separates or divorces.
If the money is gifted, and your child lives in the property with their de facto partner, civil union partner or spouse (and they have been living together as a couple for three years or more*), the property will likely be classified as the “family home” under relationship property laws. In the event they separate, the presumption is that they will both be entitled to share equally in the value of that property – no matter whose name it is in – and half of your advanced funds will be lost. Even if the couple do not live in the property, it could still be classified as relationship property and be subject to division.
In order to avoid this, the best course of action is generally to sign loan documentation when the money is advanced. This ensures that the loan can be called back in, if your child separates from their partner or spouse in the future. This would usually be in an “on demand” loan, giving you the freedom to call it in if and when you choose. Ideally, a mortgage or caveat would also be registered against the title, but often the bank (with a first-registered mortgage) will not permit that.
If your child is already in a relationship when the money is advanced, the loan can be in both of their names. If they enter into a relationship after the money is advanced, the loan will remain a valid debt and be deductible from the value of the property before a relationship property division takes place.
Another alternative is for the couple to sign a Relationship Property Agreement (Contracting Out Agreement) before the property becomes the “family home”. This could record that if they ever separate, the amount you have gifted them will remain your child’s separate property. However, there are a couple of issues with this.

First of all, you cannot compel anybody to sign a Relationship Property Agreement, and insisting on it could put your child in a particularly awkward position. Secondly, if the couple themselves do not really want to sign, there is nothing to stop them cancelling the Agreement at a later point, without your knowledge. Lastly, a Relationship Property Agreement is not 100% watertight, and the Family Court has the power to set it aside if giving effect to it would cause “serious injustice”. While the terms of the Agreement may not be seriously unjust at the time of signing, they can become weaker over time as circumstances change (for example, after a lengthy marriage, several children and some financial ups and downs). The best way to ensure that a Contracting Out Agreement withstands the test of time is to ensure that it is regularly reviewed, with expert legal assistance.
In summary, it is possible to advance money to your children for a house (or business) purchase whilst also protecting your future interests. As not all circumstances or relationships are the same, it is important to get specific legal advice to ensure that the financial arrangements you make will meet your objectives.

If you would like any further information or advice please contact either of the article authors: 
Maretta Twentyman or Debbie Dunbar, or the Morrison Kent Wellington office (04) 472-0020.

* There are limited circumstances in which people can become subject to relationship property laws in relationships of shorter duration than this. In addition, there are some circumstances in which a couple can be deemed to be "living together" for the purpose of relationship property laws even if they maintain separate addresses.

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