It may be that ‘child’ of yours is getting married or that you simply want to pass along some of the wealth you have worked so hard to accumulate during your lifetime. Either way, you want to help them buy a home. So, your first thought is to give your child money – perhaps tens of thousands of dollars – for the down payment on his or her new home. But there is a downside to giving your child cash for a down payment.
When your child marries, the assets brought to the marriage or acquired afterward usually become shareable – so if your son or daughter later separates from their spouse, the cash down payment you provided is included in the total valuation of the house, which becomes a shared asset.
If you want to protect your funds, consider structuring the transaction as a loan, not a gift. You can do this through a promissory note that includes and loan agreement and security, usually in the form of a mortgage on the home.
In many cases, your child will not be expected to make payments against the loan during your lifetime, but the amount of the loan can then be offset against the amount to be inherited by that child. And as long as the loan is in place, you will have a much stronger argument that those funds must be repaid before any remaining equity in the home is divided between spouses (or common-law couples, in some jurisdictions).
It is vital that this type of arrangement is properly documented and signed by all parties to minimize the possibility of someone denying the existence of the loan at a later date. If your child is not making regular payments of interest and/or principal, it may also be necessary to ‘refresh’ the loan from time to time to ensure it does not become statute-barred (that is, when a lent sum cannot be recovered by a creditor through legal action because of a time limit imposed by federal or provincial limitations acts).
Be sure to speak to a lawyer to be sure the funds will be treated as a loan and everything is documented. And to be sure your ‘gift’ is in line with your financial and estate plans, also discuss it with your professional advisor.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.