23 March 2022
A win-win for adult children paying their parents’ bills
A retired Bay of Plenty lawyer thinks adult children who help pay some of the bills for their elderly parents can gain financially in the long run, as well as performing an act of kindness. Eric Frykberg finds out more.
Jenny McDonnell says helping out with the cost of rates or insurance can preserve the entirety of a house for the benefits of capital gain, which will boost the value of an inheritance later.
She says the idea is a very good one during a property boom but can also make sense when house prices are levelling out or even falling.
But she stresses all such payments must be handled very carefully.
These comments come as the current cost of living crisis looms ever larger for superannuitants.
According to research by the Financial Services Council (FSC), even careful pensioners often use up their savings or investments within 10 years of retirement and have to fall back on NZ Super.
But research by Massey University shows NZ Super is not nearly enough.
Paying these bills, along with the annualised cost of repairs, can easily eat up $10,000 a year or more, which cannot be managed on a pension.
It can cost almost $800 a week on top of a pension for a couple to live an active life in a big city.
And the pension will not even sustain a minimal rural lifestyle – sometimes referred to as a diet of baked beans in Eketāhuna.
Faced with these risks, older people often try to manage their pensions carefully to cover food and bills, only to be knocked sideways by fixed costs like repairs, rates and insurance.
According to Stats NZ, the average cost of home insurance increased 217 percent in the decade up until 2021. Local authority rates increased by 63 percent in the same period. Ordinary inflation, as measured by the CPI, rose just 18 percent in the same period.
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But if the adult children pay those costs, their parents can stay in the home they love for longer, and the capital gain on the family home will usually be far greater than $10,000.
Even during a property correction, this action by adult children will help preserve the equity in a home for future inheritance.
However, McDonnell says it is important that the adult children work this out very carefully.
“You’ve got to have some agreement between the children,” she said.
“If you’ve got three children and they can each contribute $5000 a year, that is not a problem. But in some cases, one family might be quite wealthy, and the other is struggling and cannot afford the $5000.
“So you have to work out a formula for the initial contributions, and this has to be linked into the CPI, so that when the house is eventually sold, the people who paid more will get an increased portion.
“It has to be approached with a lot of care and full disclosure, because if it is not, it can lead to a lot of sibling angst when the parents pass.”
McDonnell adds there are no tax problems for this, since the children give the money as a gift, and there is no tax threshold for a gift at present.
It was also important that these payments are listed as a debt.
“If the parents went into rest home care, then the payments are a genuine debt back if there were ever an issue about the level of eligibility for a rest home subsidy.”
She adds that, as with a reverse mortgage, the money from the adult children is often not actually paid out.
Instead, it is available to be drawn on for a special occasion, such as replacing the car or going to see the grandchildren in Sydney.
“So the kids pay for the holiday overseas and record it as a debt next to their parents’ will, so that on their death, they will receive the money, whether with interest or not, it is up to the family to decide.
“So it makes it possible for the parents to go and visit the grandchildren when they do not have the funds to do so.”