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The ‘Bank of Mum and Dad’ or BoMaD is fast becoming the lender of choice for Aussie first home buyers. Or perhaps that should read: of necessity.
While Baby Boomers are finally getting their mitts on their super money, and may be freeing up cash by downsizing their home, the younger generation is trying to stretch finances to reach sky-high property prices.
And happily, a $4.9 trillion intergenerational wealth transfer is underway even before the older generation passes away, in what is called a ‘living inheritance’.
But... what happens if parents’ hard-earned money helps fund an adult child’s first or subsequent home, and they later become unhappily married… and divorced?
Don't give a housing gift – give a loan
The overarching concept in any Family Court-decreed asset split is each person’s contribution to the union. This applies whether the couple is married or has been together more than two years.
Yes, a ‘contribution’ can be financial but don’t miss that it can also be non-financial – caring for kids is a big one.
Now, when a couple is unable to decide who gets what and instead go to court, all the household’s money is lumped together and the overall split of it is tweaked for any contribution differences along the way.
Firstly, it’s rare for a ‘gift’ to one of the parties from the Bank of Mum and Dad to be excluded from the asset pool.
Secondly, it may be treated as being meant equally for both parties. Courts have done it.
This means a ‘gift’ will count as a 50% per person ‘contribution’ to the asset pool with no adjustment made to the overall split for who brought it to the relationship. The split or division may for instance remain at 50%.
This is probably the opposite of what the parent giver and their son or daughter would want.
So, what’s the solution to this division dilemma? Make it a loan instead.
What’s included and not included in the ‘property’ pool?
The asset pool is officially (and somewhat confusingly) called the property pool. It includes not just all property but superannuation and other investments, and possessions.
The vital thing is that from this property pool, any liabilities are subtracted.
It is way better for the parental house-deposit top-up to count as a loan, because that reduces the overall property pool to be divided. But to do so, it needs to be documented carefully, preferably in a binding financial agreement.
Be aware: if it’s a gift, part of it will potentially go to the ‘wrong’ person.
According to Cudmore Legal, liabilities which are appropriately documented would be removed from the property pool. Vague or uncertain debts (based on ‘hearsay’) such as an undocumented loan from BoMaD is not considered a liability and is likely to be included in the property pool.
Cudmore Legal also states: “Technically, loans should be documented correctly, registered correctly and calculated and repaid in the normal fashion, with appropriate security if applicable.”
Note: unreasonable debts incurred after the relationship separation are generally not included as part of the property pool.
What should a BoMaD loan include?
To tick the boxes of a loan document that is acceptable to the Family Court, it needs to:
Specify the money is a loan that needs at some point to be repaid.
Outline the terms and time of that repayment (even if no periodic repayments are required or made).
Lay out that the recipient has the capacity – so enough money or assets – to, over time, repay it.
This saves a whole bunch of fighting if the non-family member in a split couple decides to deny there was ever a loan. Yes it happens.
This would also apply if the intended recipient sadly dies, and their parents decide they want the money back rather than have it pass to the non-family member and ‘joint tenant’.
Note: if people who are not in a financially-dependent relationship buy a house or unit together, they would usually do it as ‘tenants in common’. This means, if one died, their share would go to whoever they have nominated, rather than automatically pass to a ‘joint tenant’ who would have what’s called right of ‘survivorship’.
Another option other than a money loan from parents, is to at least make a legal document setting out who the ‘gift’ was for. While this option is not as effective, it can stay squirreled away in a cupboard in case it’s ever, unfortunately needed.
How to protect money from BoMaD
What are the Do’s?
✔ Get a legal document or binding financial agreement saying that the money transferred to buy a property is a loan or (less effective) a legal agreement specifying it is a gift.
✔ Make sure the loan document meets the family court requirements, as outlined above.
✔ Carefully file away all records of the transaction, so the right person can claim the right ‘contribution’ – if they need to.
What are the Don’ts?
❌ Transfer or receive more money than the person or couple has the ability to realistically repay over time.
❌ Dip into the shared asset pool to repay an undocumented ‘loan’ and get the money back to its original owner on separation – the courts will take a dim view of this.
❌ Call in a loan on separation, unless there is adequate documentation to justify it.
Bottom line
BoMaD can be a generous option for adult children watching property prices increase, making the dream of owning a home slip further away.
But… you never know what will happen in the future. It makes sense to take steps to protect the money from ultimately slipping away from the family.
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Financial Disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
