By: Daniel A. Timins, Esq., CFP®
Trusted House Finance is sharing this blog as a part of our guest blog series, which shares informative blogs written by experts in the mortgage and finance industry.
I have had an increasing number of clients ask me whether they should provide their child with funds for a first home down payment, or focus on their own lifetime needs and leave their (ostensibly larger) estate as an inheritance to that child when they pass away.
Middle-class parents realize their children’s real estate purchasing power is significantly weaker than theirs was: Real estate prices have outpaced income growth over the last twenty years, and the number and cost of financial commitments (such as student loans and health insurance payments) have increased dramatically since parents bought their own first home. Many children now continue living with parents well into their twenties to grow their bank accounts instead of growing grandchildren, increasing the chance they will never have children of their own. So how should a parent expecting to live a long life on limited resources determine whether to gift funds for a down payment now or create a financial legacy for their children once they themselves die?
Here are 6 steps a parent should consider before opening their wallets to pay for a child’s first home down payment:
1. Set reasonable expectations regarding mortgage costs. You clearly don’t want to gift funds for a down payment if your child is going to apply for an unreasonably-large mortgage (and risk defaulting). Asking to be involved in the mortgage-procuring process is absolutely reasonable: A down payment should be given after a discussion about what monthly mortgage payment are acceptable to the parent as a condition to the gift. You likely have more experience paying a mortgage than you child does and should offer insights and set the conditions of the gift. You should also try to avoid being a co-signer on the mortgage to avoid exposing yourself to your child’s future financial hardships. If your child finds this unacceptable, leave them money in your Will instead.
2. Confirm whether the child’s career and income are viable for the long-term. If a child has a profession with a reputation for stability, giving funds for a down payment may be more-suitable than bequeathing them when you die. Nursing, accounting, and computer programming tend to be stable career paths with reliable incomes that allow for consistent mortgage payments.
3. Confirm the strength of the child’s marriage. If a child is having marital problems, gifting them a down payment is akin to making a gift to your future-ex-son-in-law. Family Law courts are supposed to segregate gifts from marital assets, but this gets tricky when the child and his or her spouse were both paying for the mortgage and utilities. Make sure to file a gift tax return to evidence that you gave the gift to your child so you can better-protect it and track it in the case of a future divorce. If the marriage seems weak, consider leaving a bequest for when you die so the marriage has more time to dissolve.
4. Be prepared to discuss possible inequality in gifts to different children. No two children have the same income, assets or financial habits, so some children require more financial help than others. If there is going to be dissimilar gifts between children make sure to discuss it with both children and decide whether you wish to set-aside additional funds for the child receiving a smaller down payment. Many children perceive even the smallest sibling inequality as a great injustice and may take out their frustrations on their parents and the other sibling; trying to keep unequal gifts a secret from the other child will only make matters worse when the unequal treatment is discovered.
5. Ask if the child has creditor issues. Creditor issues are venomous to procuring a mortgage and maintaining a house: Creditors can place liens on real estate that must get paid upon the eventual sale of the house. A parent should demand that the child shows them a copy of a recent credit report. Any child with recurring creditor issues should probably have his or her funds transferred using a trust at his or her parent’s deaths.
6. Explain that there may be nothing left over in the future. While children always feel entitled to their parent’s money, they do not always realize that mom and dad have limited resources. Since the whole purpose of this exercise is to either give today or tomorrow, you need to make it clear that if the child would rather receive the money today that this is the last “hand out”, and that you are planning to spend the remaining funds on yourself and not the grandchildren’s education or post-mortem gifts.
You probably know your child better than you know your finances, so if you answer these questions affirmatively you still need to know whether you can afford to live once you gift the down payment. Contact your financial planner and your accountant, and let your estate planning attorney know of your intentions before signing the contract.
Daniel Timins is an Estate and Elder Law Attorney and a Certified Financial Planner® located in New York City. He is the founder of Law Offices of Daniel Timins, a law firm which practice focuses on protecting family asset and preserving inter-generational wealth.