There are three options for helping your adult children purchase a home. Outright gifting a down payment, loaning funds for a down payment, or co-signing a mortgage.
Outright gifting a down payment
At face value, assuming you have the available capital, providing your child with a lump sum may seem like the simplest option. However, you should be aware that you lose control of the funds as soon as you gift them to your child. If your child chooses to use the gift towards something other than what you intended, you may not have any recourse. Since you would be parting with your money definitively, it is important to keep in mind your future financial needs, your life expectancy and any potential changes ahead before taking this approach.
Are there tax implications?
When it comes to monetary gifts, there are generally no tax implications to the gift itself for either the parent or the child. However, if the gifter doesn’t have readily available liquid funds to gift, they may need to liquidate investments, which could have tax consequences.
There are also other risks associated with gifting money. If the child’s marriage were to fail, your gift may potentially be subject to division of family property depending on a number of factors. You should talk to your lawyer to ensure that you and your child are taking adequate steps to protect the gift in the event of a relationship breakdown.
If you intend to give to all your children equally, you should also consider what would happen if you were to pass away before you are able to help each child in the same way. Be mindful of keeping a record of who received what over the years, and consult your estate lawyer about the steps you can take to ensure equal distribution of your estate in the event of a sudden death.
Loaning funds
Another option is to loan the money to an adult child with the expectation that they’ll pay it back later.
At the time of the loan, you should ensure with your lawyer that your intention is properly documented, which can help prevent unintended issues in the future. Discuss with your lawyer whether you should implement a promissory note, a loan agreement, a registered mortgage on title of the child’s home, or another way of documenting your intention. With formal documentation, you may be able to enforce repayment terms if that ever becomes necessary. The loaned funds may also be safeguarded against potential claims from creditors or from a spouse in the case of a relationship breakdown. However, this isn’t always straightforward, and you should consult a lawyer to discuss the value of this strategy as it relates to your particular situation.
On the other hand, a loan will increase a child’s debt load, which could affect their ability to secure a mortgage that meets their needs. Lenders will consider their debt service ratio, which calculates total debts divided by total income, to determine the size of mortgage for which they qualify.
Finally, consider what would happen to the loan if you were to suddenly pass away while sums are outstanding, as there could be unintended consequences. If a loan is forgiven in the terms of a will, there are generally no income tax implications, as debt forgiveness rules do not apply. If you intend to forgive the loan upon death, discuss with your estate lawyer how you can document your intentions to avoid any unintended issues.
Co-signing a loan
This approach would enable your child to leverage your higher credit rating and may allow them to access a lower interest rate, a larger loan, or both, compared to what they could access on their own.
The advantage of co-signing their mortgage is that you won’t have to access your own capital or liquidate any of your investments, which could have tax implications. Parents may prefer this approach because the child retains the pride of ownership while still carrying the responsibility that comes with paying for their own home.
If you co-sign your child’s mortgage, you should be aware that you may be on the hook for the full amount if they don’t meet their commitments, and your credit rating could be at risk if they ever default on payments. It could also limit your future ability to access credit for your own needs, or to help your other children in the same way.
Bottom line
Helping adult children financially may be a parent’s goal, but it could have serious implications for your long-term financial strategy. If this is something you’re considering, talk to me, your estate planning lawyer and your tax advisor so we can help you plan for it.
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