In addition to gift letters and how it can be important for parents to document which child they intend to benefit from the gift, there are other issues that should be considered when parents help a child buy a home:
1. Tax implications. For example, will capital gains tax apply if the home is registered in a parent’s name?
2. There are estate planning implications. For example, if the parent dies and the title is joint, does the child get it? Are other kids being unfairly deprived? Should the parents revise their Wills?
3. How do parents protect the property from the child’s creditors or from the child’s divorce?
4. A Declaration of Trust may be needed. This is a simple one page document that can often help with the foregoing issues. To do that Buyers need to contact me early in the process and preferably prior to finalizing any new mortgage being placed on the property. Please feel free to have your clients call me in those circumstances.
5. If parents co-sign for a high ratio mortgage, they need to realize that they are personally liable on that mortgage until it is paid off in full. So they may be better advised not to later transfer title to the child alone because they remain liable on the mortgage. They have more control over their mortgage liability if they remain on title.
6. Parents who can afford to do so should consider helping by lending money to a child on a second mortgage. This can often be the best procedure to protect against all these issues. This will have to be approved by the first mortgage lender, and it will be approved if it is done right. The buyers will still have to come up with a 20% down payment in most cases, either from the child’s own funds or by gift from the parents, or by a combination of both. Furthermore, if the parents own a corporation and the corporation lends the money, there can be significant tax advantages by proceeding in this way.
These issues should be addressed before the buyers commit to their mortgage. Otherwise, they can be stuck with proceeding with the deal in the way dictated by the Lender without any consideration being given to these matters.
Information courtesy Bill Fric, Fric, Lowenstein & Co.