Despite a thriving wedding industry and a society that loves to celebrate marriages, the sober truth is that, if your son or daughter walks down the aisle, there is a 40 per cent chance, they will eventually walk away from a broken marriage.1

And despite the crushed hopes that parents have, adding insult to injury is that money that you have given the happy couple, in hope that they can buy a home or just to help them get on their feet, is now lost or being fought over in a divorce court.

That need not happen, according to Laima Alberings, a tax and estate planner at TD Wealth. With the tough housing market today, her clients are wondering how they can provide money to their children but also protect it if, unfortunately, worse comes to worst.

“So that’s why when I talk about what’s the best way to provide money to their children to buy a matrimonial home, I ask, ‘Is it important to protect your contribution from any future divorce or separation?’” she says. If the answer is yes, then you need to take action to safeguard the funds.

The problem, Alberings says, is that if a parent simply gives money as a gift, they lose control of it. The scenario people want to avoid is when this money is used as a down payment for a home, for instance, and then a few years later the marriage comes apart. In the case of a divorce or separation, family law dictates that the matrimonial home in which a couple lives is treated differently than all other assets and can’t be sold without the permission of both parties. If there are no complications, the value of the home, minus any mortgage, may be split 50-50 and that means any gift given previously to the couple that went into the equity of the home, will also be split 50-50.

Alberings notes that common-law relationships are not necessarily treated the same under provincial legislation when it comes to property division on the breakdown of the relationship. The Family Law Act (Ontario), that specifies that couples must share the financial gains on assets during a marriage, applies only to married couples. However, Alberings also says that common-law spouses could nevertheless sue their former partners for an interest in the property if they feel they have made a significant contribution to it. If both common-law spouses are on title of a home, all things being equal, they may end up sharing the proceeds of the home if the relationship ended.

“I ask, ‘is it important
to protect your
contribution from
any future divorce
or separation?’” she
says. ”If the answer
is yes, then you need
to take action to
safeguard the funds.”

LAIMA ALBERINGS,
TAX AND ESTATE PLANNER,
TD WEALTH

One way to avoid this, instead of giving a ‘no strings attached’ gift, is to make a formal secured loan to your child and or their spouse. This means a trip to a lawyer and legal fees but it will cement the intent behind the money. The loan, secured against the property, should be documented, with a clearly defined payback schedule, rate of interest and date when the loan will be paid back. In the case of divorce or separation, the loan should be excluded, because the money has been documented as a loan, not a gift.

Alberings emphasizes that the loan should be drawn up by a lawyer. If an informal agreement (“pay it back when you can”) is drawn up on the kitchen table and there is no real expectation that the loan will be paid back, this home-made loan may actually be regarded as a gift if the issue comes before a judge.

“If the parents intended to provide a loan rather than a gift — let’s say the terms of the loan are loose and are not enforced, or they regard the money as a loan only after the children separated, then the courts are unlikely to enforce this loan,” Alberings says.

A secured loan can also protect parents’ money if an adult child has trouble with creditors. Since the loan is secured against the title of a property, it will have a priority over other creditors’ claims to the assets.

“If the parents intended to provide a loan rather than a gift — let’s say the terms of the loan are loose and are not enforced . . . then the courts are unlikely to enforce this loan.”

LAIMA ALBERINGS,
TAX AND ESTATE PLANNER,
TD WEALTH

There are other methods of protecting your money. An unsecured loan is an option but would give even less control over any money provided by the parent than a secured loan since it doesn’t have a claim over the asset, and would not allow a parent to take control of a child’s home, if it came to that. And a parent would have to wait in line with other creditors if a child defaulted on the unsecured loan. While an unsecured loan with a financial institution would involve higher interest rates, this is something that would be negotiated between the parent and child.

Here’s another idea. If the parent owned a property, was not living in it, and was willing to have their child and partner live in it — the parent could use a fully discretionary trust. The idea would be that the child would live in the property and the trust would specify under what conditions the property can be used. In this way, since the property remains in control of the trustee (the parent) and it can’t be lost to an in-law in the event of a marriage breakdown or lost to a child’s creditors.

If a parent wants to give a gift of cash to a child but not for the purpose of buying a home, parents may wish to ensure the safety of the gift is through a ‘deed of gift.’ Drawn up with the help of a lawyer, it may shield the gift from being regarded as family property and therefore may protect the gift in the event of a future divorce or separation. The deed of gift would state the amount gifted, and that any growth or income generated from that gift is only to be considered a gift to the child and not his/her spouse.

Without a deed of gift, if your child’s relationship breaks down, your child’s spouse may try to argue that the amount was a gift to both of them. As well, provincial family law legislation may dictate that only the principal amount given by the parents was intended as a gift and that any growth on the funds could be divided between the spouses during a divorce settlement.

Matters of contract and family law are complex and it is recommended that you seek legal advice before providing funds to your child for the purchase of a property, whether your child is married or in a common-law relationship. A financial professional can also help you provide funds to your child as they move through life and take measures to help ensure that this money is as safe as possible.

Was it a gift or loan?

In 2015, a case was brought to an Ontario court regarding money given to a married couple by the husband’s parents.2 The couple was married in 2002 and the husband received $90,414.39 from his parents to help fund the down payment of their new home. The parents also gave him an additional $67,000 for further upkeep of the home.

Later in 2011, the marriage broke down. The home, which was in the husband’s name, was sold and the proceeds went into his mother’s account. However, soon afterward, the money found its way back into the husband’s account. The ex-wife did not receive any proceeds and took her former husband to court.

The ex-husband claimed that he had signed documents with his parents that stated the money was a 10-year loan and had to be paid back with interest. However, they could not produce any paperwork, claiming that the mother had accidently destroyed the documents when she was cleaning the house.

Without any loan documentation, the judge ruled that the money advanced for the matrimonial home was a gift, which meant the wife was entitled to an equalization payment of $56,000 plus interest.

— Don Sutton, MoneyTalk Life