Saturday, December 14, 2002
Share the wealth without the risk
With one in three marriages ending in divorce, parents are anxious about how their cash gift will survive if the marriage doesn'tGigi Suhanic
With one in three Canadian marriages expected to end in divorce, couples aren't the only ones contemplating the future with a mix of hope and trepidation.
The parents of engaged couples, alarmed by the country's 36% divorce rate, are seeking to take some of the risk out of wedlock, especially where significant gifts such as cash and property are concerned.
Sam Hanan (not his real name) is one father of the bride who finds that the odds against success in marriage fall well outside his risk tolerance level.
Mr. Hanan has a 29-year-old daughter whose nuptials are planned for next year. As a wedding gift, he has given his daughter and future son-in-law $60,000 or 25% of the purchase price of their new home for the downpayment.
"I wanted to give them a good start. It allows them to get something better," says Mr. Hanan, noting that the gift was given without strings attached. "I'm resolved to give the money, take the risk and hope for the best," he says.
The home was purchased in both the couples' names but in retrospect Mr. Hanan is wondering how he can protect his daughter from having to share the $60,000 with her spouse should the marriage become another unhappy statistic.
"You don't want to hurt people's feelings. I'm not trying to suggest I don't trust the situation," Mr. Hanan says. "But the chances are high something could go wrong."
While Mr. Hanan's desire to put some kind of protective mechanism in place for his child might dampen the romance factor for the young lovers, his question, says Barry Fish, a wills and estates lawyer with Fish and Associates in Richmond Hill, Ont., "is not off the wall."
"This thing comes up all the time," says Mr. Fish, who has co-authored the book The Family Fight: Planning to Avoid It.
"Kids come up to parents and say, 'we'd like some help.' The minute you ask that question, parents ask, 'How do I protect my child?' "
Unfortunately for some parents, says Mr. Fish, "they don't become alert to all the issues," until it's too late.
Mr. Fish describes one scenario he recently encountered where parents decided to surprise their son and daughter-in-law and pay off the mortgage on their home.
Unbeknownst to the parents, the marriage was foundering. "Days after the parents paid off the mortgage the wife threw the son out of the matrimonial home," Mr. Fish says, leaving the parents with no recourse to recoup their money.
Luckily, for Mr. Hanan, there's an easy solution to his quandary.
Analysts say Mr. Hanan can -- as he is now hoping to do -- take out a second mortgage on the $60,000 as long as the couple are willing.
Adrian Mastracci, a financial planning advisor with KCM Wealth Management in Vancouver, says from the point of view of security a mortgage is preferable as opposed to something like a promissory note.
The terms of the mortgage can be whatever the two parties agree to. For example, Mr. Hanan can charge 0% interest and recall or forgive the loan at any time. However, if he decides to charge interest, he would have to declare it as income and pay taxes on it, Mr. Mastracci says.
The mortgage papers should be drawn up by a lawyer or a notary and would be registered on title as a charge against the property, and signed by both.
If the daughter and son-in-law should divorce and sell the home, the $60,000 would revert to Mr. Hanan once the bank and outstanding property taxes were paid. He could then give the money back to his daughter.
If Mr. Hanan doesn't pursue the mortgage and decides to gift the money, it will be split between his daughter and her husband in the event of a divorce, says Kevin Wark, chief executive of Toronto-based Equinox Financial Group and author of Everything You Need to Know about Estate Planning.
Under Ontario family law, any gift made to a married child is protected from the other spouse as long as the gift is documented with a cancelled cheque, a letter or a deed of gift, as examples. Any future income earned from the gift would also be excluded providing the person making the gift documents that intention, as well.
However, once a gift of money makes its way into the family home, as Mr. Hanan's $60,000 has done, then it's considered part of the family assets.
"Dad shouldn't give a gift if he's concerned about the long-term prospects," says Barry Corbin, a lawyer with Fraser Milner Casgrain. "Far better to make a loan and secure it with a mortgage. Then he has a string attached," Mr. Corbin says.
If for some reason the mortgage route doesn't work out, another option couples and parents turn to is a marriage contract. Where Mr. Hanan's daughter is concerned, it's not too late to draw up a contract that would cover off the $60,000.
In drawing up a marriage contract, the couple must disclose all their assets and it's recommended each person receive independent legal advice.
A marriage contract may be ignored by the courts, says Mr. Wark, if these steps aren't followed. "You can't hoodwink your spouse and you can't put undue influence."
While marriage contracts are recognized by legislation, John Askin, a Vancouver-based tax lawyer with the Wealth Strategy Group, says he has a concern regarding their authority.
The Supreme Court of Canada heard arguments at the end of October from wealthy Ontario hotelier Eric Miglin asking the court to overturn an earlier ruling allowing his and his former wife's final divorce agreement to be revisited.
Mr. Askin says if the high court comes down on the side of Linda Miglin, that would have the potential to throw all marriage agreements into doubt.
For his part, Mr. Askin says he favours discretionary family trusts as a way to provide protection for his clients from former spouses.
Such a trust gives the trustee the ability to determine on a discretionary basis which beneficiary will get what and when, says Mr. Askin. Because the beneficiary has no enforceable rights to the property and assets protected by the trust, that means "an ex-spouse can't go after it," he says.
Mr. Askin says he has clients who own family farms that have been passed down through the generations.
"When you start talking non-lineal descendants getting their land, you get their attention."
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