Many families are offering their adult children an early inheritance to help them buy a home. It is a great way to giving them a step up if the capital is available.
However, it is important to consider the estate planning impacts. If your Will doesn't account for these early inheritances, then you may end up with unequal legacies.
Also, with interest rates rising, Mum & Dad may be called on to help with mortgage repayments because the adult child can't meet the repayment amounts. These additional amounts may add up to a reasonable sum and could erode the capital .
Take the example of Joe and Melinda and their 3 children: Samuel, Justin and Stephanie.
Samuel received $150,000 over 3 years ago to buy a home.
Justin recently bought his home and is experiencing difficulty meeting the repayments with the rise in interest rates which is also causing difficulties in his marriage. He has asked Joe and Melinda if they can lend out with $2000 per month.
Stephanie however still hasn't received her inheritance and has not bought a home.
The questions that arise out of this include:
Time value of money: Samuel received $150,000 whereas Justin's $150,000 had less buying power after 3 years of inflation. Stephanie's share is not adjusted for inflation either so her $150,000 will buy even less. This is easily fixed by indexing the original amount to inflation.
Accounting for the early inheritances from the estate: if Joe and Melinda pass away, their Wills say the estate is to be shared equally between the 3 children. In this case, Melinda will miss out on her 'house deposit' early inheritance and the Samuel and Justin will effectively get extra because of it. A well designed Will can account for early inheritances and ensure that all receive the inheritance intended.
Loans: Justin's loan of $2,000 per month needs to have some level of paperwork so that Estate can adjust his inheritance amount for the loan balance outstanding and not unfairly use the other children's inheritance to wipe the loan balance.
Separation: If Justin and his wife divorce, the early inheritance could form part of the family assets and may be split with the leaving spouse. If you prefer that didn't happen, the 'inheritance' amount could be a loan, which is likely to be repaid prior to accounting for the family assets in the event of divorce. It is possible for the loan to be forgiven in your Will effectively turning the loan into a gift after your death. Legal advice is recommended when setting this up.
Disputes: Stephanie could argue that she has been unfairly treated and did not receive an equal share of the estate. This could create rifts in the family and possibly even erosion of wealth because of legal battles.
What can be done?
A Will can be written to account for early inheritances, loans and the impact of inflation so that the share you intend for each loved one is what they receive. This will reduce the risk of fighting, legal fees and unintended inheritance amounts.
If your will doesn't account for early inheritances contact us, find out more on the following pages or speak to your lawyer.
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