Handing over cash to a child can create legal issues with other siblings and rogue ‘in-laws’, Ivamy said, as family loans are often made without legal protection. He warned advisers not to let clients rely on unspoken agreements.
“It’s not only mum and dad that need protection, what about spouses or the next generation? What are the ramifications of the bank of mum and dad and what happens when the proverbial hits the fan?” Ivamy asked National Adviser Conference Attendees.
It comes as the bank of mum and dad grows in prominence across the world, with many millennials locked out of the property market by rising house prices and flattening wages.
About $71 million was lent by the bank of mum and dad in New Zealand last year, making it the sixth biggest ‘lender’ in the country for first home buyers. Parent lent about $90,000 on average according to a recent New Zealand survey.
Ivamy said advisers needed to be aware of “strategies to protect the bank of mum and dad”. He said advisers could add value to their client proposition by raising the issue.
Ivamy said advisers needed to consider the method of payment and whether it was a gift or a loan. He said clients should record terms and conditions, such as whether a home is a relationship property. He said this could help avoid future legal disagreements: “It’s about process and procedure.” Ivamy added: “It is a business transaction. While it might be a family arrangement there is still a need for certainty for each client.”
He said advisers should ask their clients to record whether a loan is part of their investment portfolio or whether interest is incurred. He said all parties should sign the agreement: “Is it going to be repaid? What does the bank of mum and dad want? Is it appropriate for the bank of mum and dad to own a share in the property?”
Ivamy said people could use trusts to pay out cash from the bank of mum and dad, and deduct accordingly from their will, to avoid disputes with other family members. He added: “There needs to be a record of the trustees making that decision. It’s not the decision they make, it’s the process and documentation of what they have done.”
