Legal Tip 25: Children helping parents out

Children helping parents out


Following up on my post regarding Parents Helping Children (see here), sometimes its the adult children that need to help the parents. What to consider?

1. Asset protection
   
   
2. Death
   
   
3. Incapacity
   
   
4. Divorce of the child
   
   
5. Social Security
   
   
6. Interest rates
   
   
7. limitations Act
   
   
8. Reverse mortgage
   
   
9. etc
   

Just briefly, where a child wants to help a parent this must be carefully thought out and planned to minimise risks.


Case study

Dad has died and Mum is living alone in a big house. her only source of income is the pension, but the costs of the house and general living expenses are not enough. There is plenty of equity though. Mum has 3 kids (adults). 1 Kid wants to help out, the second kid doesn’t, the 3 wants to but can’t afford it.


Mum is contemplating selling the house and buying a smaller home. Trouble with this is mum may have to move to a different area to afford something. Stamp duty, legals and agents fees would be involved. Children would not get to inherit the family property with good growth potential. There could be social security issues with the pension being reduced if the sale means mum is left with too much cash.


If child A helps mum by giving her say $500 per week and mum dies the house will likely go to all 3 children in equal shares. Child A has ‘lost’ her money.


Mum could get a reverse mortgage on the house. But the rates are high and this could be costly and it is also potentially risky as any default could mean the property is sold.


Child B could employ mum on his business. Mum could earn a small amount of money so that it supplements her pension without it affecting the pension. But this is a lot of mucking around and mum may not be up to it.


Another solution is all children chip in equal amounts of money each week. Hard to organise and one will surely miss payments here and there.


Perhaps the best solution could be for the ‘richer’ child to simply loan mum the money. She could pay mum amounts each week, enter mum’s bank account, after they both enter into a written loan agreement. When mum dies mum will still owe this money to the child and this will be paid out of the estate before the remainder is divided up in equal shares. Interest could be payable, but the child will have to pay tax on the income so it may be better at no interest. The other children are likely to kick up a stink when the estate is distributed so mum should seek legal advice and an evidentiary trail should be established to prove the loan and the payments of money. It can be good to discuss this with everyone before the payments start so that everyone knows about it and there are no surprises.

 

What would be a default situation with a reverse mortgage?

 

Good question - generally there are no payments until death. I have never read any loan agreements in relation to reverse mortgages, but a default situation could be death of one of a couple, change of use such as renting the property out when moving to a nursing home, failure to keep the home in good order, damage, being uninsured,

 

Parents..... Pffft....apart from bring us into the world, raise us until we left home, supported us through our hardships/breakups, guided, nurtured, counseled etc. What have they ever done that we need to support them in their twilight years?

 

Wondering if anyone had any thoughts on this scenario for helping parents.

Parents own PPOR (value about $550K) and is on partial aged pension.

Adult child:
- wants parents to live in a newer house in a better location
- wants to get into property investment and wants to buy such property (around $700K-$800K) and rent to parents (goal is principally long term capital gain, provide for parents to move to nicer location and less concerned about income)
- is on highest marginal tax rate
- does not want parents to sell their PPOR

Intention is for adult child to rent new property to parents. Parents to pay market rent from proceeds of renting out their PPOR. If parents' rental income is less than rent owed to child, parents will fund from via cash gift from child. Parent's income will not exceed tax-free threshold.

Any major issues with this strategy (assuming that parents asset test is below the combined $816,000 for part aged pension entitlement)?

The thinking is that the alternative of parents selling PPOR and buying the nicer property is not feasible/attractive because (a) parents can't afford to buy the more expensive home and (b) there would be transaction cost wastage from selling PPOR.

 

Sounds good.