File photo of houses and lots for sale in Halifax.Sandor Fizli/The Globe and Mail
Generous parents could go broke paying for expensive weddings, children returning home to live, children in debt and children (or grandchildren) who want to buy a first home. Helping out adult children in a crisis is something most parents do if they are able, but when should you start saying no? If you are at, or approaching, retirement age, the help you give now could put your retirement in jeopardy.
More than 10 years ago, a freelance industrial engineer bought a second house in Halifax (currently valued at $900,000) with the idea of renting it out to supplement retirement income for him and his wife.
But the couple, now in their 70s and semi-retired, haven't yet been able to enjoy that extra income, which they had intended to spend on travel, small luxuries or maintenance on their principal residence in Halifax (valued at $1.5-million).
Shortly after they bought the second home, their daughter divorced. James (who did not want his real name used) and his wife offered it to her and her two children to live in rent-free. The daughter has since had a third child with a common-law partner who now shares the house with her. Both work at least part-time, but they do not pay rent, nor have they kept the house in good shape, which has affected its value. Any attempts to work out payment have failed.
While both houses are mortgage-free, the owners have only government pensions and draw from $200,000 saved in a registered retirement income fund (RRIF).
James is sympathetic to his daughter's difficult financial situation but would like to find a solution that provides him and his wife with some extra income while not leaving his daughter and grandchildren homeless.
He has thought of converting the house into a triplex by partnering 50-50 with a builder friend to fund the project. He would then allow the daughter to continue living rent-free in one unit while collecting rent from the second and giving the builder the third. But he would lose 50 per cent of the ownership of the house, which he eventually plans to leave to the daughter.
(There is a second daughter, who is not in financial need, who would inherit the principal residence.)
James worries that his help may actually undermine his needier daughter because he is not showing confidence in her ability to provide for herself and her family. He also wonders when he is going to be able to cash in on his investment for retirement.
"We're not going to end up living under a bridge but we won't be able to continue our current standard of living much longer," says James. "We'd like to take a few trips while we still can travel."
We asked three experts to weigh in on James's situation.
Ian Black, fee-only financial planner and portfolio manager at Macdonald Shymko & Co. Ltd., Vancouver
The parents have $2.4-million of real estate and $200,000 in liquid investment assets, so they're disproportionately invested in real estate.
We're financial advisers, but a lot of it is dealing with human nature – saving people from themselves and from making bad decisions. That's what this is. It's difficult because the daughter has been living rent-free for a number of years. That needs to stop. Market rent in Halifax for a $900,000 house would be anywhere from $1,500 to $2,500. She could pay at least $500 a month with the realization that it's going to be $750 in three months or $1,000 a year from now. That way they have to make some decisions about their own lifestyle.
We'd first ask the parents what they need to live on. We can use the actuary tables to say people of their age are going to pass away at age X, and we add some years to that. Then we'd say, "Here's your asset base today, and you're not going to make it, or your RRIF is going to be depleted at X and you'll be left with CPP and OAS."
If they still wanted to help the daughter, they could sell the $900,000 house and move her and her family into a two-bedroom condo worth $400,000. Then they would at least get some equity out of the house. The parents need to say, "You've had a good, long run at this. It's our fault because we've supported you, but the reality is that it can't continue or we may be forced to sell our own house and trade down."
From an estate point of view, they should keep the ownership of the condo. If the daughter separates from her common-law partner, and the condo is in her name, he could claim half. If she doesn't own it, there's no claim against it. It's good protection for everyone.
Another idea is for the daughter and her family to move in with the parents, even though that might cause friction. We all have to make choices in life. If that's presented as one solution, it might motivate them to try to be able to provide housing for themselves.
Ron Graham, principal with Ron Graham & Associates Ltd., Edmonton
It makes a difference that there's another daughter. When it comes to estate planning, it's important that James and his wife identify what they want in their wills. If the daughter living in the smaller house gets that house because she's lived there for years without rent and the other daughter gets the big house, what are the tax implications? If the value of the investment property has gone up significantly, there's going to be a capital gains tax on that. Who will pay the taxes? Those issues should be ironed out in the will. Then the parents need to explain ahead of time what's going to happen to the properties for each of the children so there are no bad feelings at their death.
In general terms, I find many parents help their adult children to their own detriment. I've seen circumstances where mortgages or lines of credit had to be put on the parents' houses to give more help to the kids. Then the parents get to retirement with less saved than they should have.
Before giving financial help to children, first determine if you can afford it and second, decide on the limit of the help you're prepared to give. Then ensure everyone is onside. It's essential to have that discussion.
Susan Stefura, principal, Bespoke Financial Consulting Inc., Toronto
One of the issues here is finding suitable housing for the daughter and her family.
The first solution is to keep the home and start charging the daughter a level of rent that will give James and his wife additional income without pushing his daughter and her family over the edge. The main problem with the rent solution is that it doesn't free up a chunk of capital now that James and his wife may want for travel or to do the needed renovations to that home.
Another possibility is the triplex solution with a business partner. But James should think carefully before bringing in a third party. He'll need to have a separate legal agreement between them, because what happens if either of them dies? If James dies, then his friend is the one dealing with his daughter. It's not a good long-term solution. Plus there will still be expenses to pay after rent is collected – property tax, insurance and maintenance. Would James make enough? And is this reduced space right for his daughter's family? Also, by selling half the property, there would be instant capital gains, so a tax bill to pay.
The third option is to borrow against the Halifax home with a mortgage or secured line of credit, to provide immediate funds for James and his wife to fix up the property and give them travel money. Again, it's not a good long-term solution. You can't borrow indefinitely to pay for house maintenance. Also, if James and his wife die, the loan would have to be repaid. Then the home would have to be sold. They could also borrow against their principal residence and use the proceeds for their cash infusion and renovations. But do you really want to be borrowing in your 70s? You need an income to support it. Plus, this solution doesn't help the daughter become more self-sufficient.
The fourth solution is to do whatever renovations are essential and sell the home. James could then give the daughter a lump sum as an early (and final) inheritance so she can find a nice home of her own.
Helping their daughter become more independent and self-supporting would be a longer-term solution. Maybe they could help her by paying for daycare after school so that her youngest is looked after while she does additional training or works more.
James and his wife need to ask how far they're prepared to go and how much of their own lifestyle they're ready to sacrifice because there are limited resources.
Experts' responses have been edited and condensed.