It is satisfying to be able to help grandchildren with university fees or housing deposits, but you must get your estate in order first and ensure your later life is funded and doesn't hold any surprises for your family after you are gone.
The bank of mum and dad is an expression that the media uses very often and is well talked about when it comes to helping struggling first-time buyers make that first step onto the property ladder, but increasingly its grandparents that are helping out financially too.
We are told regularly that the cost of living, static salaries, a buoyant rental market and the increase in property prices often see younger people living at home for much longer to save for deposits and families are often keen to facilitate the first step on the property ladder.
Statistics tell us that more and more couples and individuals in the middle and late 30s remain in rented accommodation for this very reason.
As a solicitor specialising in private client matters, I am being increasingly called upon by parents, grandparents and elder relatives to advise how to structure gifts to family members with the specific aim of purchasing a first home. It often seems like a simple solution, particularly for those later on in life, to provide financial support for younger relatives that they will appreciate and be of great value long after you’re gone.
If you’re still a home owner, one option that might be worth considering if you are looking to financially support younger relatives is an equity release, whereby you unlock wealth from your home without the upheaval of having to move. Drawdown lifetime mortgage schemes are usually the most popular type of equity release plan, as they enable you to release equity as and when you need it – such as an early inheritance to children and grandchildren for example. Interest rolls up over time and is only repaid along with the amount released either when you and your partner move, pass away or go into long-term care.
But as with many things this kind of arrangement deserves further consideration – are you planning on giving the money or is it a loan? What kind of protection do you have for the future and what happens to the money you give or lend if your child or grandchild were to suffer financial issues or get divorced, separated or end their civil partnership?
If it’s a loan, is there interest to pay and how have you recorded that arrangement? Is there a mortgage planned for the balance of the purchase monies and, if so, is the lender aware of this additional loan?
As the person giving the money, have you considered the impact on your own financial position? Are you sure that you can afford to lend or give that capital away and what if you need the money later on in life? If you have to get that money back, can you? And if so over what period of time.
Lots of questions to consider.
If you are making a gift to a relative, a factor not often considered is the need to protect the recipient – and your/ their capital - from the possibility of relationship breakdown or financial difficulties. Quite often younger people will purchase a property together with friends or a partner and in that case it might be appropriate to have a declaration of trust protecting each parties contribution. The alternative might be to consider taking advice on a cohabitation agreement if the joint ownership is in the context of a relationship rather than friends buying together.
Whilst your generosity may be very welcomed by your children and grandchildren, you may also want to consider what your needs will be in retirement, and whether you should be making provisions to fund your own care in later life. Be aware of your current and future financial position and don’t overpromise more than you can afford.
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