While purchasing a home may be on few peoples’ minds right now, home ownership remains a long-term goal for many Millennials. And it’s becoming increasingly common, and quite frankly necessary, for new home buyers to rely on gifts from their parents in order to be able to buy into the real estate market.
If you are a parent thinking of helping your child purchase their first home, then you probably want to make sure your gift is protected in the event your child later gets married, or already is married.
How is property divided upon separation anyways?
Firstly, it’s important to understand how property is treated when couples separate. In Ontario, when married couples separate, the value of their respective property is divided in accordance with a process called “equalization”, which essentially means each spouse is entitled to share equally in the other spouse’s increase in net worth accrued during the marriage, referred to as their “net family property” (NFP).
Using a simplified example, if Spouse A had a net worth of $10,000 on the date of marriage, and a net worth of $100,000 on the date of separation, their NFP would be $90,000. If spouse B had zero net worth on the date of marriage, and a net worth of $50,000 on the date of separation, then their NFP would be $50,000. Therefore, the difference between Spouse A’s and Spouse B’s NFP would be $40,000 ($90,000 – $50,000). In order to “equalize” their respective NFPs, Spouse A would have to pay Spouse B half of the difference of their respective NFP’s, which would be $20,000, so that both spouses leave the marriage with $70,000 each.
While this example shows that each spouse essentially gets a credit or deduction for the value of any assets owned on the date of marriage, the main exception to this is where one party has brought a home into the marriage, and that home ends up being the home the parties are living in when they separate, otherwise known as the “matrimonial home”. In the case of a matrimonial home, the entire value of the home is used in calculating any equalization payment owing, even if the home was owned by one spouse prior to the marriage.
What are the potential family law risks of helping your child purchase a home?
If you gift your child money to purchase a home before they are married, there is a risk your child would have to share in the entire value for the home with their spouse in the event they later get married and separate while still living in the same home. Even if your child doesn’t end up getting married, but simply has a partner move in with them, there is a chance their partner could make a trust claim to share in some of the value of the property you helped your child buy in the event of separation, if their partner contributed funds to mortgage, maintenance or upkeep of the property.
If you gift your child money to purchase a home during their marriage, there is again the same risk that they would have to share in the entire value of the home with their spouse in the event they later get married and separate while still living in the same home. While any gifts received during a marriage are typically exempt from equalization, so long as they remain clearly traceable, gifted funds lose their special “gift” status if they are contributed to the purchase or maintenance of a matrimonial home.
So, what’s the solution? A marriage contract or cohabitation agreement
The best way to protect funds gifted (or even loaned) to a child for the purposes of purchasing a home is through either a cohabitation agreement (for cohabiting couples) or a marriage contract (for married spouses) which would set out your child’s and their spouse’s intentions with respect to how their property would be treated in the event of separation. A cohabitation agreement or marriage contract can enable parties to essentially opt-out of the regular law on property, as outlined above, and make their own decisions about how they wish to protect and divide their respective assets in the event of separation.
The family lawyers at Mills & Mills LLP can assist in preparing Marriage Contracts and Cohabitation Agreements to ensure your child’s assets are protected in the event of separation. Contact us online or at 416-682-1025.