Before doing it... Think twice.
Straits times.
Thinking of buying an apartment for your adult children so that they can have a headstart in life without the extra financial burden of mortgages?
Before well-off parents jump on the popular bandwagon of financial planning by getting their kids into real estate as well, they should realise that such moves are not without pitfalls.
One of the biggest risks is that such valuable investments will be shared by the kids’ estranged spouses if their marriages fail.
Unlike other pre-marital assets that are usually excluded, it is often hard to keep property from being shared if it is used as the couple’s matrimonial home.
People who already own residential property cannot apply for a Housing Board flat and they will have to foot the additional buyer’s stamp duty (ABSD) if they buy another home with a future spouse.
So it is very likely that young couples will use existing properties that were gifted by their parents as their matrimonial homes.
Here are three important points parents should note before gifting properties to their children.
Inheritance becomes matrimonial property
A recent divorce provides the starkest example of how family inheritance can end up being shared by people you no longer want to have any dealings with.
During the good times, the wife in this case had no qualms using two houses given by her late mother as the matrimonial home.
The houses, which were valued at $6 million, were adjacent and linked via a common back gate.
As their three kids grew, the couple sold their apartment and used the sales proceeds to link-up the two houses so all the family could live there comfortably.
They built a common kitchen and dining area in the second house and converted the kitchen in the first one into study rooms.
The husband, a banker, was the sole breadwinner and he paid the bulk of the renovation costs.
Although the two houses belonged to the wife, this was a classic case where the spouse could have a share in them after he had “substantially improved” the properties.
The value of the houses dwarfed the couples’ other assets, which were valued at about $2.7 million
The High Court later found that the husband was entitled to a 40 per cent share of the combined assets of $8.7 million. While he received $3.48 million, his wife got $5.22 million, which was less than the value of the two houses she inherited.
Compare this to another case involving well-off parents who allowed their son and daughter-in-law to live in their $5 million house.
When the son’s marriage failed, his ex-wife tried to get a slice of the house, which was partially owned by the son because it had been their matrimonial home.
But the Court of Appeal ruled that the house was not up for sharing because it belonged to the parents, who had paid for everything.
And since the ex-wife merely lived there and did not do anything to improve the property, the court ruled that mere residence would not entitle her to claim her ex-husband’s share of the house, which remained as a pre-marital asset.
Risk of over-leveraging
Parents should always consider their own needs first before draining their retirement funds just so junior can have a home. There have been several cases involving parents who regretted such decisions because they found themselves short of cash later in life.
They tried to stake claims to their kids’ properties but failed because they could not reclaim gifts that had been properly made.
If you have paid for a property, a “resulting trust” will usually enable you to claim the share you are entitled to. But it is hard to persuade the court to rule in your favour if the purpose of letting your kid hold the property was to save you from paying the ABSD.
Cash is king
If you truly want to make adult life easier for your kids, consider opening joint bank accounts for them with generous dollops of cash.
They can then draw on these accounts if they need help and the balance would be off limits to ex-spouses as it would be deemed pre-marital funds.
Parents should not be overly hung up over property because the most valuable assets they can ever give to their children are love and wisdom, which are priceless.
