Financial contracts with family

Angela and her husband are buying out their in-laws’ home

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Q: My husband and I live with his parents to assist them with care and maintenance of their home. My father-in-law is an amputee and the understanding was that we would stay with them and take over the house “once the mortgage is paid”.

My husband’s parents have not put this arrangement in writing and yet we continue to contribute to household expenses and project costs. What is the best way to be protected in the event of their death and the best investment plan considering we don’t have a mortgage payment . . . or equity in the house formally?

Angela

A: Mixing money and family is often difficult. And no doubt the situation you are in is a tricky one, Angela.

First off, it’s noble that you guys are taking care of your in-laws. Secondly, I agree that it’s important that you deal with the financial implications up-front.

From your perspective, I’d be worried that you guys are there chipping in and helping out and that it may never be realized or recognized financially. Do you know the details of the mortgage? And even if you do, do you know that there’s not additional debt in the form of a second mortgage or secured line of credit over and above? It would be unfortunate if you were supplementing your in-laws’ costs and expecting to be compensated some day and that didn’t happen. As such, the “once the mortgage is paid off” promise might be totally legit, but who knows?

I assume that your husband doesn’t have siblings, Angela. This could be a real landmine if you don’t have things documented formally and he does have siblings. If things aren’t documented, or if their wills are not up-to-date, who is to say you guys won’t be splitting the house based on the terms of the will? If he has siblings, it’s that much more important to document things properly–for everyone’s sake.

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In your in-law’s defense, how much are you contributing to the house? What would fair market rent be for your “half” of the house? You guys are covering costs, but how much of that should be considered over and above your effective rent for sharing the house? Your in-law’s reluctance to document things may be more of a “you’re going to get our estate anyway” sort of thing.

Regardless, these things are important to address head-on. It’s in everyone’s best interest that these discussions are on the table, understood and documented so that you’re all on the same page. I think that’s the basis upon which you need to approach these issues with your husband and your in-laws.

The care you are providing is so difficult to quantify financially. That part of the equation really is more art than science.

In practice, Angela, you guys could buy the house from your in-laws–either outright or just buy out half the house. They may be more inclined to sell you half the house so it preserves their ownership in the house. And you may then feel more comfortable contributing when there’s a formalized ownership stake.

Another option is a joint partner trust that can hold your in-law’s house “in trust” during their lives and ensure it passes to you on their deaths. This is a bit trickier on a number of levels, but has other benefits, like bypassing probate fees (death taxes).

I would be inclined to bring up some of the basic concerns that you have and then suggest that the four of you speak to a professional–likely an estate lawyer–who can walk you through the pros and cons of different approaches.

As far as an investment plan beyond the house, you guys need to engage in retirement planning just like anyone else to work towards saving up a nest-egg to supplement your government and private pensions. If you have no debt, due to the house and mortgage being in your in-laws’ names, you need to consider company pensions, RRSPs and TFSAs, just like anyone else.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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