We are all told that our kids will come to us with begging bowls in the hope that their parents’ bank will bail them out for a house deposit.
Many will tell you this has all to do with the consumption of avocado and toast at your local café. But I am not so sure. You would have to consume a crapload of avocado and bake a crapload of bread before you go through an entire house deposit.
No. This is because the rate of house price rises, and wage inflation are not precisely what you call synced. This means house prices are like a runaway express train, and wage rises are like a tortoise.
Don’t get me wrong. Wage rises are good, but compared to house prices, they are crap. This means that banks want more extensive deposits before they lend, forcing kids to knock on parents’ doors.
As parents, we are deemed so mean that we are compared to Ebenezer Scrooge if we do not bow to them and give them all our hard-earned savings.
I know I show my age when discussing things from my youth, but the concept or vision of going to my mum and asking for a deposit to buy a home was laughable.
But I look at house prices and think we live in an insane world—and I bet you do, too. So much so that despite setting up my kids for the financial future, I think it is only a matter of time before both my kids come to me with a begging bowl.
At the time, I hope I do not listen to my wife, who is as sentimental as any mother, and I hope I do not listen to whatever is left of my heart. I hope and pray to the Almighty that I listen only to my brain and do what I tell all my clients to do when they ask me for advice about giving kids their money.
Why do I say this? Well, we become gooey like a warm chocolate dessert for our kids. Logic goes out of the window, and we become governed by our hearts when logic is needed.
That is because I am finding that all those warm and gooey parents have worked out that warm and gooey does not work for them and now need to move to something stiffer—like a shot of stiff whisky or maybe a bottle of whisky.
This is not because their children have become nasty, run away with money, or even refused to pay it back. In many cases, your kid will not be the problem—their partners.
Because of this, many lawyers become involved. When that happens, you need not just a bottle of whisky. It’s going to be an entire case, followed by a suitcase load of cash, which you will ‘donate’ to the lawyers.
When kids come to their parents with a begging bowl and ask for money, parents tend to give it. There is rarely a discussion of gifts or loans, and there is almost no chance that any of it is put on paper.
As a general rule, I will always tell clients that if their child asks for money, they should document it as a loan, even if they do not intend to return it.
The problem is that many will need to follow the advice. It has something to do with becoming a warm, gooey chocolate dessert.
I say this because once money is given without paperwork, it is hard to get back. If you want it back, you have to go to court (hence the many lawyers), and it is likely that in court, it will be deemed a gift. If it is deemed a gift, there is a chance you may have donated the money not to your child but to someone you may not actually like.
I know what you are thinking. When would that happen?
Well, picture this.
Your son is lovely and decides to marry an equally lovely girl. They are so adorable that you are 100% in favour of their marriage. Soon after, they come to you for a house loan. And because they are so lovely, you give them $100,000.
A few years pass, and 2 equally lovely grandchildren are born.
Unknown to you, the couple started having problems and decided to divorce.
You now decide that you would like your $100,000 back. But your ‘now not so loverly daughter-in-law’ argues it was a gift, and you try to argue it was a loan. Your son backs you up on this, too.
So, in court, the judge will ask the logical questions: If it was a loan, where is the loan documentation? Are there any emails suggesting it was a loan? Has interest been paid?
Without this, the judge would conclude that the gift was a gift and that gifts cannot be claimed back. And this ultimately means you have gifted your not-so-lovely, soon-to-be-ex-daughter-in-law a minimum of 60% as she also has custody and needs to look after the kids. It is entirely possible that your ex-daughter-in-law gets the house, and your son ends up living with you again (this is exactly what happened to one of my clients, so do not think it will not happen) with you being $100,000 poorer.
However, this does not only apply to giving money to purchase a home. We often see it in succession plans where parents consider passing down their business. If shares in the business are gifted to the child who subsequently splits from their partner, the business ownership could be divided, too.
My prediction is that as more kids come to their parents for a handout, more parents will get caught out. If you don’t want to get caught out, cancel the gooey chocolate dessert and order the bottle of whisky instead.
Maintaining and keeping your wealth is step 1 and 9 of our 9 steps to working less, earning more, and building wealth. If you would like to know more, contact Hitesh@wowadvisors.com.au or Ros at ros@wowadvisors.com.au or call us on 07 3161 9548.
