Obviously if your parents downsize, they will release some money which will help improve their standard of living. The released money will probably get used up, and you will inherit less.
If they reverse mortgage the house, you may inherit nothing.
You also know that you must save money for your own retirement, and that any inheritance will add to your retirement savings.
One solution is for you and your brother to give your parents some money from time to time which they would use as income to top up their National superannuation.
But how? One method you could use is to give your parents a fixed amount per month structured as a gradual purchase of their home. In effect you would be investing in their property and would be paid back when they pass on. Since property often increases in value over the medium to long term, you may well share in some capital gain as well.
The common problem that usually arises is one child can pay more than the other, or one can pay and one cannot. This can easily be overcome with the appropriate documentation and record-keeping.
The house is worth $400,000 so it is agreed that that it consists of 400,000 shares worth $1 each.
You decide to invest in your parent’s house at $400 per month, so each month you are buying 400 shares in their house.
Your brother can afford $200 per month so each month he is buying 200 shares in their house.
That gives your parents an extra $600 per month income which will make a significant difference to their standard of living.
A legal agreement would be needed and it would be essential to have someone qualified such as an accountant to record the amounts as above and keep bank statements as proof.
Probably once every 3 to 5 years the accountant should look at the house value and alter the share price accordingly e.g. if the house grew in value to say $500,000 divided by 400,000 shares, then each share would be worth $1.25.
The record-keeping is particularly important - if one parent has died and the other eventually has to go into a rest home, WINZ will want them to pay if they can – they will have to pay if they have assets of more than $213,297.
You will need documents and records to prove to WINZ that you and your brother legally own shares in their house and you must be able to show the value of your shares.
Rose coloured glasses have no place in any financial arrangements, and you must look for what can go wrong before signing up. In this case there is no free ride for your parents - if they take money from you and use it for a better standard of living, they own less of their house and have less options/less cash in terms of trading down to a smaller home later on. (none the less, this can be a win/win).
You need to save for your own retirement and therefore it is extremely important that you eventually get this money back. Hence you will need to be paid back on the sale of the house and it is important that your parents understand this before you start out.
If your parents decide to move to a smaller house, or a retirement village, it may be possible for you to continue ownership in the new property, rather than being paid out. New documents will need to be drawn up, but it should not be too complex.
What happens when your parents pass on?
If their house sells for say $600,000, each share in the house is worth $1.50. If over the years you have bought 50,000 shares in the house, you will receive $75,000.
If your brother over the years has bought 25,000 shares in the house, he will receive $37,500.
These amounts will be deducted from the funds in your parent’s estate and paid to you.
Then assuming your parents have decided to leave you 50% each, the remaining funds in the estate will be divided 50-50.
So what has been achieved?
- Your parents have enjoyed a better standard of living in retirement
- They have not had to downsize the house or reverse mortgage it so you receive a much bigger inheritance
- The structure of the share purchase program ensures the person who pays the parents more receives more, which as it is as it should be – an equitable arrangement
- You share in any capital gain on the house
- Your retirement savings programme has helped both you and your parents
- A win-win all around