Presenter: Peter Lindstrom, resident director in Pahiatua
Palmy co-directors: John Mills, Michael Fennessy and Melissa Bourke
Office on cnr of Rangitikei & King Streets, ph: 358 6075
50% of our business is residential conveyancing. The balance of our work includes advising on relationship property, Trusts, Wills and estates, all of which have relevance to this topic.
Independent Legal Advice
- Always get independent legal advice, from a firm that is not acting for your child
- Independent legal advice ensures a greater understanding of the risks involved, which can be dire (for e.g., loss of home, bankruptcy)
- Independent legal advice means that the advice you are given is free from the influence of anyone else’s interests; that lawyer is acting only for you
- Independent legal advice helps protects the Bank from the defences of undue influence and lack of awareness
- Lawyers have little scope to change a Bank’s documents, but what scope there is for change, is best sought by the independent lawyer
- Remember that whatever solution is decided upon, there is no material gain or upside for the parent, just risk
- Lawyers can only act for more than one client in a transaction when there is a less than negligible risk of a conflict – it is hard to see a case where independent legal advice would not be required, given what is at stake
Gifting
- Outright gifting is not usually prudent
- If the gift has been applied to the child’s relationship home then their partner has a claim to half the benefit on separation
- If the home is security for the child’s business borrowings then the equity of the gift may end up in the hands of a creditor
- A gift can adversely impact upon your annual gifting limits and entitlements to residential care assistance under the current MSD asset tested and income tested policy
- Estate planning and parity between children
- Some Banks require the parents financial assistance to be a gift
- If a gift for a home has been made to a child who is in a domestic relationship or comes to be in one, it adds to the necessity of the child executing a contracting out agreement (‘pre-nup’) before the property is permitted to become the relationship home
- A contracting out agreement will protect the equity created by the gift as your child’s separate property
Deed of Acknowledgement of Debt and Agreement to Mortgage
- Preferable to a gift
- Parents can document a loan on an interest free, upon demand basis
- Should be signed by child and their partner so that it is a relationship debt
- Can be called up in the event of a separation
- Affords the ability to become a secured creditor (behind the Bank of course!)
- Can either forgiven in your Will or called up as an asset of your estate
- Some Banks will accept the Deed of Acknowledgement/Gift of Debt in Will option as satisfactory for their lending purposes
- Is the most preferable option
Guarantees
- The parents ‘underwrite’ the child’s debt to the Bank
- Is one of the most onerous third party Bank security arrangements there is
Features of a customary Bank Guarantee
- It has no expiry date
- It is not linked to a specific loan
- The scope of liability can be unlimited, unless negotiated otherwise with the Bank
- No party other than you has a legal responsibility to see to it’s release
- The Bank has the ability to pick and choose between the debtor and the guarantor as to which persons it will pursue in default; it does not have to pursue the debtor first
- If you have a mortgage to the same Bank then it becomes security for the debtor’s loan also; some Banks will seek a mortgage from you in any case
- If you cancel the guarantee you still have a contingent liability to the bank for the loan balance then outstanding
- Guarantors are jointly and severally liable which means that one individual can end up paying for the whole lot
- You have the right to say no, or at least limit your liability
Joint Borrowers/Co-debtors
- The parents are co-borrowers under the home loan agreement to the Bank
- The Bank has the benefit of the parent’s home as security under the lending arrangements in order to comply with the LVR rules
- The parents have a direct debtor relationship with the Bank, being equally responsible to the Bank to service the loan
- While the parents may feel that their relationship to the Bank is notional only, ultimately it is not and may hamper your freedom to deal with your own home as you otherwise might
- For example, if you wish to sell your home you may have to pay a chunk of your child’s mortgage from the sale proceeds to make sure that they stay within the LVR rules. This could be a considerable amount of money, it comes from your equity and restricts the funds that are available to you. Consider the impact of this if you wish to move to a higher value home, for example
- A Variation: Consider a parent owning a share in the property and is a joint mortgagor in the child’s home with the Bank agreeing to limit the parent’s liability to their share in the child’s property
Family Trusts
- A number of parents will have their assets owned by a Family Trust
- The Trustees ability to enter into a financially supportive arrangement for a child is curtailed by their duties to the other beneficiaries and not to put the Trust assets unduly at risk
- Accordingly, Trustees should not enter into guarantees in this context, nor should they contemplate a co-debtor arrangement
- The Deed of Acknowledgement of Debt and Agreement to Mortgage is the best arrangement for a Family Trust
- In place of a gift, a distribution of part of the Trust Assets is made and needs to be documented formally. It may entail the child waiving any future equal entitlement to the Trust Assets
