Johnston Lawrence

Helping Children Buy Houses: How can the trust help?

25 September 2008. by NZ Law Releases , tagged with NZ LAW Releases | Property | Trusts Estates and Wills

From time to time we receive enquiries from trustees who wish to help a child to purchase a property, often their first home. This type of enquiry is not confined to trustees, however trustees probably have more decisions to make when deciding to help children than individuals due to the nature of trustees’ obligations and their inter-relationship with beneficiaries. This article looks at the implications for a trust to support a beneficiary in the purchase of their first home.

The facts

Lisa is a beneficiary of your family trust, and has a reasonable expectation to receive support from the trust from time to time. She is in a long-term relationship with Johnny (whom you approve of) and your hope is that at some stage they will ‘tie the knot’.

Lisa has rung to tell you that she and Johnny have found a property that they wish to buy; the purchase price is about $500,000. The bank has said that, based upon the property’s valuation and their incomes, Lisa and Johnny can probably borrow $400,000. The hitch is they only have $20,000 cash between them, and need to obtain a further $80,000. Can the trust help?

The trust does not have the $80,000 readily available, but you are confident that, with some judicious liquidating of investments, you can come up with the necessary $80,000. However, what other issues should you consider before giving Lisa the go ahead?

Trustees’ obligations

Trustees have an obligation to consider the interests of all the trust’s beneficiaries when making decisions. If Lisa was an only child, and the primary beneficiaries were (say) her and the both of you as her parents, then this would not appear to be an issue. If, however, Lisa had three brothers and sisters, and the trust fund (its assets) only had a value of $80,000, then the trustees would need to carefully consider whether it would be desirable for the entire trust fund to be used by one beneficiary.

How to provide the funds?

Assuming that the trust had sufficient funds and/or a small number of beneficiaries, how should the trust funds be made available to Lisa and Johnny? The most likely methods of providing the funds would be by a distribution from either income or capital, or a loan. It could be assumed that, for most trusts, the distribution of $80,000 is most likely to be a capital distribution, that is, a transfer of a portion of the trust fund from the trust into the hands of a beneficiary.

The downside of such a distribution is that this would be received by Lisa, and would be used to buy a house that she is presumably going to co-own with Johnny. At some stage, depending on the length of their relationship, the conversion of the capital distribution to Lisa into an interest in their home is likely to become relationship property, and therefore be divided between Lisa and Johnny if their relationship was to end. There are several options available to the trustees to distribute or lend funds to Lisa (and Johnny) to buy their house.

The challenge is to ensure those funds remain as trust capital, and this will be covered in a future article. However if you are a trustee wishing to help a beneficiary, then please consult us first!

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