Probably the simplest way family can help is intergenerational living, which is something I can speak to from personal experience – my mother-in-law lives on our property.
It was important to my husband to ensure his mum was looked after and I hope our two wee boys learn from their dad’s fine example.
Luckily, she’s wonderful and it’s a very happy arrangement for all, but I totally get that it’s not for everyone. It takes the right mix of personalities to rub along harmoniously, and everyone needs their own space.
But Cameron Bagrie, economist and founder of Equity Release NZ, recently mentioned one option that doesn’t involve all living under one roof.
Bagrie advises clients on home reversion and reverse mortgage options – but tells them to first talk about whether there’s a way to achieve that within the family.
“Is it better for the family to take an equity stake in the home? Say you’ve got one family member, one sibling, that’s got a bit of money, and they’re prepared to fund mum and dad … those sorts of avenues should always be investigated,” Bagrie told me, because: “They always tend to be more cost effective.”
That could look like an adult child advancing either a lump sum or drip feeding funds to their parents and either taking a stake in the family home (similar to home reversion, which is the sale of equity to a financial provider); lending the funds (akin to a reverse mortgage); or giving it as a gift (I mean, they gave you the gift of life, right?)
Done well, the first two options have the potential to both provide parents with the cash they need in retirement, and the child with an investment.
Done poorly, it could be a powder keg of problems – we’ve all heard horror stories of what can happen when grief and greed collide, but that’s just the start of what can go awry.
I would stress that if you want to pursue this route, all parties need separate legal advice, financial advice and everything needs to be formally documented. This is not something to do on a handshake over a Sunday roast. No one should feel – or be – coerced or guilted into being on the giving or receiving end.
Henry Stokes, trust and estate expert and general counsel at Perpetual Guardian, warned it’s simpler when it’s an only child, or all children can afford to contribute equally. “Where only one child is going to help out it is best for the whole family to be fully aware of what is happening, how it will work and what it means.”
Stokes recommends documenting the arrangement in a deed setting out the terms, including “what regular payments will be made, whether lump sum additional payments are intended at any stage, how the value of the property is set for determining how much of a share the child is purchasing, what is to happen if the home needs to be sold etc”.
That deed doesn’t need to be mentioned in the will for it to be effective, he says, but the two should be kept together, and your legal adviser should “check the terms of your current will just to make sure there are no conflicts between the two”.
You’ll also need an independent valuation, because if the “sale” price isn’t commensurate with market value you could run into trouble when it comes to eligibility for aged care assistance, should the parents need it.
Depending on what the prevailing capital gains tax regime is at the time you may also need to think about that as part-ownership of your parents’ home could be subject to tax if you already own your own.
Anyone considering doing it for their parents needs to think hard about their own financial circumstances. A sense of obligation can skew your decisions, but what would happen if your situation were to change – a divorce, an illness, or – if you’re using debt – interest rates spiked? What if your parents live to 100, and your capital remains tied up until then?
If you’re the retiree strapped for cash and your children can’t help – or it’s unthinkable to ask them – please don’t dismiss the previous options I’ve discussed just because it dilutes your children’s inheritance. An inheritance is not a right, it’s a privilege – and not one you should sacrifice enjoying your life to provide.
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