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Should You Be the ‘Bank of Mum & Dad’?

The phenomenon often referred to as the "Bank of Mum & Dad" is becoming increasingly pertinent as we witness the largest generational wealth transfer in history, with home ownership at its core. In New South Wales, home prices have soared to an average of $1,184,500, placing significant pressure on parents to assist their offspring in climbing the property ladder. With the target cash rate holding steady at a 12-year peak of 4.35% through 2024, many are feeling the pinch.

Assisting with a Deposit: Pros and Cons

Should parents step in to help? While many would prefer to assist their children now rather than through an inheritance later, it’s vital to ensure that such help doesn’t jeopardize their financial security. The direct approach of gifting cash for a deposit is straightforward but comes with drawbacks. Lenders may scrutinize the source of these funds, and in cases of divorce, the gifted amount could become part of a property settlement.

Gifts from family are typically not taxable under income tax laws, provided they are out of natural love and affection. However, if parents opt for a loan arrangement instead, it’s crucial that the terms are clearly documented, potentially by legal counsel, to cover all eventualities including divorce, remortgage, or death.

Acting as a Guarantor: What to Consider

A family guarantee is another avenue, allowing parents to use their assets to bolster their child’s borrowing capacity. However, this carries the risk of the parents having to cover the debt if the child defaults, potentially forcing the sale of the parents’ assets.

Buying Together: Joint Ownership

For those considering co-ownership, whether as joint tenants or tenants-in-common, it’s important to establish a clear, written agreement outlining the terms of the arrangement. This should cover scenarios such as one party wishing to exit the co-ownership or disputes arising.

Utilising a Family Trust

A more complex option is purchasing the property through a family trust. This strategy offers asset protection and potential future tax advantages when control of the trust is transferred, though it complicates matters regarding CGT and state taxes.

Rent-Free Arrangements and Future Planning

Providing a property for your child to live in rent-free can be seen as an immediate form of support, but it may complicate their future ability to secure loans or utilize property equity for wealth building. It’s crucial that any such arrangement is considered within the broader context of your estate planning to ensure that intentions are clearly documented and supported legally.

In conclusion, while the desire to help one’s children is natural, the implications of such financial assistance are complex and require careful consideration and planning. As always, it’s best to hope for the best but plan for the worst.

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