The global pandemic we are currently facing has put tremendous pressure on everyone, and caused serious financial strain for many. During times like these many people are considering how they can financially help their loved ones get through the loss of a job, the temporary closure of a business, or changes to financing with respect to an upcoming real estate purchase.
It is imperative that individuals speak with their financial advisors before providing monetary assistance to others. If you have taken that step, and you have decided to help a family member or friend, consider the following questions and legal implications before moving forward.
- Should my financial assistance be a gift or a loan?
This will be up to you (and your financial advisors). In either event, it is important to make sure that you are clear with your intentions, and that those intentions are understood by the individual(s) receiving your financial support. Be it a loan or a gift, your intent should be carefully documented, in writing. Absent proper documentation, both gifts and loans can lead to unintended consequences and unanticipated disputes.
- I am being asked to sign a “gift letter” by a financial institution. What does this mean?
A gift letter is something that is often required by a lender (a bank or credit union) if a borrower is receiving money from an individual to help with the purchase of real estate. The most common example of this is the ‘bank of mom and dad’ where parents will provide money to their adult child to help with the down payment on a property. The reason a lender will require this is that they do not allow a person to borrow money for their down payment, so they want the money to be documented as a gift.
If you are providing money to someone and are signing a gift letter you need to be aware that once that letter is signed, and the funds are paid, this cannot be undone. This means that you have no legal grounds on which to later collect those monies back from that person. However, there may be other ways to manage that gift, such as through your estate planning (see below).
- How will my gift impact my estate planning?
If you are considering a gift to an adult child, you should consider how your estate planning will be impacted. For some, it will be important that if they gift money now to one child, ultimately all of their children will be treated equally; for others, it will be important that a gift given now is treated completely separately, not to be considered on death. There is no right or wrong answer for this, but it is important to make sure you are informed, and that your intentions can be fulfilled through your estate planning.
Whether you have current estate planning documents in place, or have yet to get a Will, it is a good idea to have a discussion with a lawyer who practices in Estate Planning so that your wishes in this regard are properly implemented. Again, if you do not document your intentions, you (and your family) may face unintended consequences.
- If I decide on a loan, what steps can I take to secure repayment?
This is going to depend, in part, on the reason for your loan. If you are providing your child with cash he or she requires to purchase a home (because, for example, they’ve lost their lending commitment from their bank), you should consider registering a mortgage against the property. Alternatively, if you are loaning your child enough money to cover his or her short term living or business expenses while we ride out this pandemic, a loan agreement or promissory note might be appropriate. In each case, you should consider the terms of your arrangement, including the timing for repayment and interest provision, so that those may be properly documented.
- I am worried that if I give a gift to my child, his or her spouse will ultimately benefit if they separate. Can I give a gift to my child, but not to his/her spouse?
You can, but it will again come down to documenting your intentions carefully. Under the Family Law Act of BC, a gift from a third party is exempt from division on separation. However, your son or daughter receiving the gift would be best served to discuss the use of that money with an experienced family law lawyer, as his or her use of the funds will have a fundamental effect on how those monies are treated later during a separation.
If you have family in need and would like to consider lending a helping hand during these difficult times, reach out to one of our lawyers to discuss your intentions. We are available to help you provide this much needed assistance in a way that will ensure that your intentions are properly documented, and your interests and the interests of your family are protected.
The foregoing is intended for general information purposes only and should not be construed or relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you in the context of your particular circumstances. We are available for videoconference and phone calls to adhere to physical distancing recommendations.
Kate Snowsell is an estate planning and real estate lawyer at Doak Shirreff Lawyers LLP. She can be reached at [email protected] or 250-763-4323.