BMO expert explains why a client's urge to help buy a home must not damage their own financial health
Picture the scenario. Your client’s daughter has met the man/woman of her dreams and, after a wedding to end all weddings, the blissful couple want to own their own home.
Hand-cuffed by the cost of property, a lack of savings or the cost of living in one of Canada’s major cities, they tap up the “Bank of Mom and Dad”, who are desperate to help and make sure their child is on the ladder and set up to embrace life.
It’s a common situation and one which brings unique family relationships into the advisor’s office. The urge to help your children is understandable and not to be discouraged but a finance professional has to take the emotion out of the equation to make sure the “gifting” of money makes sense for all parties.
Jennifer Muench, Regional President, British Columbia, BMO Private Wealth, told WP that advisors must ensure the parents are not damaging their own financial health in order to help secure a home for their child.
She said: “Depending on their situation, there could be a significant impact on retirement savings. Their own home equity could also be an issue eventually because they haven't been able to pay it off and then, ultimately, their financial independence.
“It’s also important to understand what the child’s situation is – whether they have outstanding debts and whether their spouse or partner has outstanding debt.
“How secure is that relationship? The parents must understand that, when they’re giving that gift, it may not be just to their child.”
Strategies to protect after-tax gifts may include a promissory note outlining the purpose of the gift and when and what it is to be used for. It may be left in a will or the parents may want to see their child enjoy the money while they are alive – either way they may want to talk to the partners’ family to discuss an equal contribution.
As an advisor, having a good relationship with the client to be able to talk through the decision and its implications is a must, according to Muench.
“First and foremost, they must assess their own situation before you're giving that money. And then, secondly, they must really talk it through with their children to make sure they understand the intent of the gift and to make sure everyone is on the same page.”