What happens to your down payment if no agreements are in place?
Anna-Marie Musson, a lawyer at Musson Law in Toronto, says the parents she deals with rarely understand the implications of loaning or gifting money to their children.
“What we’re seeing in the trenches is people don’t realize this. They’re shocked to learn what happens if their child should break up with their partner,” she says.
Some parents believe that if their child’s name is the only one on a home’s title, a breakup won’t be an issue. Their kid keeps the house and the bank of mom and dad stays happy.
That’s not the case. In the event of a breakup, after the mortgage debt is accounted for, the ex-partners share the amount of remaining equity equally.
“It doesn’t matter if [your ex] is on title or not. You get no credit for the amount you put into the matrimonial home,” Musson says. “You get no credit for what your parents gave you.”
Let’s say you, making a strong case for Parent of the Decade, provided $400,000 to your daughter and her spouse for the purchase of their first home. Four years later, when the couple’s total equity in the home totals $600,000, she and her partner decide to go their separate ways.
Even though the lion’s share of that equity is the result of your down payment, your daughter and her ex are each entitled to the same amount — $300,000.
A quarter of the funds you provided, as well as the equity it helped the former couple accrue, are now largely irretrievable.
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What the bank of mom and dad can do
Just like any other bank, the bank of mom and dad can turn to the law to protect its money.
Some parents hope to put an informal legal structure in place by simply calling their gifts loans. The belief is that by assuming the role of creditor, parents legitimize their claim to the money they’ve provided in the event of a split.
Not true. Calling a gift a loan is meaningless.
“The courts are saying that if you are going to have a loan, you need to make some effort at making sure the loan reflects as best as it can what a bank loan would be,” Musson says. “There needs to be interest rates. There needs to be repayment. There needs to be consequences if you miss a repayment. You can’t call a gift a loan and think that’s going to protect you.”
A better option may be to draw up a marriage contract or, in the case of a couple that has no plans to wed, a cohabitation agreement.
These agreements are relatively straightforward, and specifically state that if the couple receiving the money breaks up, the cash will be returned to the parents, either as a lump-sum or a percentage of the equity. The remaining equity gets split evenly between the newly severed couple.
“It’s a much fairer result. We’ve paid back the bank of mom and dad and the remaining amount the kids get to keep,” Musson says.
Both marriage contracts and cohabitation agreements can be signed after the fact. Just because your child has already walked down the aisle doesn’t mean it’s too late to protect your money.
“But obviously the best time for all of this is when you’re looking to purchase the home,” Musson says. “When the parents are gifting money, we’re actually advising them to make it conditional that they have this contract in place.”
Broaching the subject
Any discussion that involves money, love and contracts is, for many people, a rather awkward thing to have to consider. Young couples may find them particularly unpleasant, if not unnecessary.
But one could argue that a relationship without an abundance of difficult conversations isn’t a relationship at all. As uncomfortable as they are, honest conversations about money, and the reality that many marriages crash and burn, shouldn’t be shied away from.
These are discussions parents, their children and their children’s partners need to have.
“What I can say as a divorce lawyer seeing things on the other end, is that couples who are not on the same page financially have a much more significant breakup rate than couples who are,” Musson says. “I can almost tell from the signing of the marriage contract if they’re going to be back in my office in the next five to seven years.”
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