A new court ruling about gift letters is offering brokers some expert advice they can pass along to clients, although they may want to do so on the QT.
A new court ruling about gift letters is offering brokers some expert advice they can pass along to clients, although they may want to do so on the QT.
“The expectation is if (a parent) makes the gift, it’s going to go to both of (their child and their spouse),” says William Fric, of the firm Fric, Lowenstein & Co., “but this decision opens the door to prevent that from happening. It is one of the realities of real estate – and you may want to suggest this option to clients as part of your offer.”
Gift letters are often required by mortgage companies when parents are helping children buy a home. Mortgage companies want to see that the down payment either comes from the borrowers’ own resources or has been gifted.
In a case decided last week by the Alberta Court, a father had made a gift of $83,500.00 on the purchase of property by his son and daughter in-law. Later, the son and daughter in-law divorced. In the legal action to divide the matrimonial property, the father said that the gift was intended solely as a gift to his son. Alternatively, he told the Court that it should be treated as a loan. Otherwise, the wife stood to receive $41,750.00, one half of the gift, on dissolution of the marriage.
Fric says it definitely opens the door for parents to limit who can benefit from the proceeds of such gifts, an important consideration especially now, and he has been astounded at the feedback from the public and agents after posting the ruling on a Calgary Real Estate blog.
“I’m surprised at the reaction I’m getting on this one,” he says, being a regular contributor to the blog. “But it is what I thought was particularly interesting in this ruling, that if the parents had stipulated otherwise (named the son specifically), the wife would not have been able to touch it.”
In this case the Alberta Court of Queen’s Bench agreed with the wife. They treated the $83,500.00 down payment from the husband’s father as a gift to both the husband and wife and therefore the wife got her $41,750.00. But the Court decision leaves it open to specify that a gift is to one child only, argue some experts.
For Fric, his advice to parents offering a gift to help their children purchase a home is that they can avoid making grief for themselves down the road if they specifically name who the gift is for – for example, not the spouse who is now divorcing their little darling.
“Today, new homebuyers are almost always getting help from the parents,” he told MortgageBrokerNews.ca. “It is a good piece of advice to pass along to anyone applying for a mortgage.”
Still, brokers may be opening a can of worms in even broaching the subject with a couple and their parents.
