How do we make sure a home deposit gift is fair for both our sons - Mary Holm

It's good to explain to your children what you are doing and why when it comes to gifting money. Photo / 123rf

Keeping it fair

Q: Some years ago we gifted money to our son to assist in purchasing a home.

Now that we want to do the same for a second son, we are not sure whether we should give the same amount or adjust for the years he hasn’t had it, inflation, etc. Just wanting to be fair.

A: This is one of those questions with no clearly right answer. But if it were my family, I would adjust the amount for house price inflation.

That’s easy to do, using the inflation calculator on the Reserve Bank’s website. It covers general CPI inflation but also how much prices have risen for food, transport, clothing, wages, or housing.

Let’s say you gave your first son $100,000 in the second quarter of 2018. The calculator tells us you should give your second son $136,043.

However, if the first son’s gift was in the third quarter of 2021, you should give your second son just $91,113 – because house prices have fallen since then!

The most recent housing data in the calculator is for the third quarter of last year. But house prices have barely changed since then.

One more thing: I suggest you explain to both sons what you’re doing and why.

The same goes for unequal legacies in wills. It’s good when a giver outlines why Child A will receive more than Child B while the giver is still alive. It’s all very well saying, “I don’t need to worry about the aftermath. I’ll be dead.” But I’ve seen long-lasting family rifts that might have been prevented through conversation.

Misleading?

Q: You have said several times that one should not use money to buy shares unless you are prepared to leave the money for at least 10 years.

I have held a small portfolio of NZ and Australian shares for about 12 years, and most of them have produced reliable dividends.

However, the growth in value has been minimal, and in the case of “growth” shares, the result has been negative. I am not complaining, but I think it is misleading to assume that over 10 years you will come out on top.

There is an awful lot of luck in picking the right shares, and I wonder whether it is better to go for companies most likely to produce dividends (so-called ‘blue chip’ companies) and not worry about capital growth. Just be grateful if you get regular dividends and your capital is not eaten away.

A: Occasionally, a diversified investment in shares doesn’t grow over a 10 year period, but it’s rare. And it pretty much never happens over 15 or 20 years – so keep holding on if you happen to have a really unlucky run.

But the key word in that last sentence is “diversified”. To be confident of doing well you must either own a large number of shares – preferably 20 or more – across a wide range of industries in several countries, or diversify the easy way, in a KiwiSaver or non-KiwiSaver share fund.

Your portfolio may not be diversified enough. For one thing, it’s not a good idea to stick with just New Zealand and Australia.

Also, you’re not including dividends in your returns. They are just as much a part of returns as rent is in a property investment. To be confident of gains over a decade or more, you need to reinvest your dividends. Some companies offer automatic reinvestment, or you can do it yourself. In share funds it happens automatically.

It’s okay, of course, to spend dividend money on groceries or good times. But you have to remember that when judging your investment some years later.

On blue chip companies versus “growth” companies, blue chips’ prices tend to grow more slowly, on average, but they pay more dividends. Growth companies are usually newer, and they need to keep their profits to fund expansion. Their share prices tend to either grow fast or collapse. In other words, they’re higher risk.

As you say, there’s lots of luck in stock picking. S&P research shows about three-quarters of NZX shares perform below average, while a small number do really well. But how do you know in advance which ones? The lower-risk strategy is to “buy the market” in a wide-ranging fund that preferably charges low fees.

Still, as another reader says, “There’s something to be said for the thrill of the chase. Fortunately I’ve managed to kill a few foxes.”

If you enjoy picking shares, and accept that your portfolio will quite likely perform worse than share funds, go for it.

What can trust beneficiary do?

Q: I have a question regarding a family trust. The beneficiaries have been offered a distribution structured as a loan, but only if they agree to gift the trustees a proportion of the loan. One of the beneficiaries has already accepted this arrangement and has paid the “gift” to the trustees.

Would this not fall under “not profiting from acts as trustee or acting for a reward”, as outlined in trust law? Or is this a workaround under the Trusts Act 2019?

If this arrangement is not legally sound, what can a beneficiary do to challenge it?

More broadly, how can beneficiaries ensure trustees are fulfilling their duties and responsibilities without incurring the significant legal costs and time involved in engaging a lawyer or going to court? I would greatly appreciate any guidance you can provide.

A: I tend to avoid running letters about family trusts in the column. I’m told that I do too much for better off people, and trusts tend to fall into that category. Also, the questions tend to be technical and therefore not great reading over a weekend coffee.

But your letter concerned me, so I sent it to Rhonda Powell, a barrister who specialises in trusts, wills, estates, equity and family property.

“This sounds inappropriate on the face of it,” she says. “Trustees are not supposed to profit from their trusteeship, and they are supposed to act solely in the interests of the beneficiaries. However, it will all depend on the circumstances.

“The Trusts Act 2019 did not reform the law to any significant degree. It simply restated the existing rules in a more accessible format. Trust deeds can ‘contract out of’ some of the usual principles that would otherwise apply, and most do. But the trustees still need to exercise their powers for a proper purpose and in the interests of the beneficiaries.”

What can a beneficiary do about the situation? “They can refuse the loan, and request a distribution,” says Powell.

“They can question the validity of the approach being taken. But ultimately, trust issues can be very difficult to resolve without a lawyer. I don’t see any good alternative if the trustee digs in.”

What about going to a Community Law Office or CAB?, I asked Powell.

“They will simply refer them to a lawyer. If they cannot afford to pay a lawyer privately, then they could try and find somebody who would act on Legal Aid. This may not be easy. Unfortunately, trusts are supervised by the High Court and working with the High Court process is challenging for a non-lawyer who is not familiar with all the rules. It is an access-to-justice issue.”

In short, says Powell, “Trusts can create a whole lot of expensive complexity.”

Reverse mortgage interest rates

Q: In my recent letter in your column, I referred to a reverse mortgage being of less risk to the lenders. With a “normal” mortgage the lenders may not be repaid (especially in today’s economic climate), necessitating mortgagee sales, etc.

But a reverse mortgage involves a lower percentage of the value of the house. The lender has a guaranteed return of their loan, unless the house is destroyed and the insurance premiums are not up to date, for instance. It’s a much lesser risk in that the lenders themselves also say that the loan is highly unlikely to ever exceed the value of the property!

A: That’s a fair point. So I asked New Zealand’s two providers why they charge higher interest on their reverse mortgages than on ordinary mortgages.

Heartland Bank says its reverse mortgage offers three guarantees: lifetime occupancy; no requirement to make repayments until the property is sold; and no negative equity – which means you can’t end up owing more than the proceeds of selling your home.

These three guarantees “are examples of factors that can affect the cost of capital required for us to fund the product, which in turn results in a higher interest rate than what you would typically see on a ‘normal’ mortgage,” says Heartland.

Says SBS Bank, “In a traditional mortgage, the borrower repays the loan through regular monthly payments. In a reverse mortgage, repayment is deferred until later in the borrower’s life, increasing the lender’s exposure to risk. Higher interest rates help offset that long-term risk.”

Also, “With a reverse mortgage, the loan balance increases as interest is added to the outstanding principal over time. This means the lender faces the possibility of receiving less than the original loan amount if the borrower lives longer than expected, which is mitigated by a higher rate.”

SBS offers similar guarantees to Heartland. See their websites.

The fact that two banks compete for reverse mortgage business probably helps keep interest rates from getting too high – plus of course the reactions of customers. Still it would be good if more banks made the market more competitive.

Why not mortgage funds?

Q: I never invest in managed funds investing in mortgages. The failure of someone to repay one of the mortgages is a loss to investors in such a fund.

In contrast, investing in term deposits in a bank that in turn issues mortgages and other loans means if someone is unable to repay a mortgage or loan, this impacts the bank’s capital before it ever impacts those holding term deposits in the bank. The bank capital provides a buffer to term deposit investors - until sufficient mortgages or loans fall over, resulting in the bank failing.

The depositor compensation scheme (DCS) will now extend that buffer further for bank deposits.

A: You’re quite right. And it may well mean that returns on term deposits become lower than they would otherwise have been. Banks and other TD issuers won’t have to pay as much to entice investors.

Meanwhile, mortgage funds – which are not covered by the DCS - may have to pay higher returns. Still, readers interested in investing in these funds should take heed of your warning.

Book winners

People who run contests always say, “It was so hard to choose the winners.” But I really mean it. Thanks so much for all your entries – moving, funny, worrying, or heartwarming.

Several themes came through. Many people are struggling. They may have lost jobs or fear losing them, or they just can’t make ends meet. Older people want to help younger ones with their financial knowledge. Younger ones just want to get ahead.

Among the winners of a copy of the updated Rich Enough? A Laid-back Guide for Every Kiwi:

• Tight jandals - Dave Steele of Warkworth: I desperately need Rich Enough because my budget’s tighter than my jandals after a hāngī—and my savings plan is “hope for a Lotto miracle”.
• Best poem - Marie Cotter of Te Puke:

Oh please let me win!

Your book would be fantastic!

I never ever win a bloody thing

Except maybe for being incredibly enthusiastic!

• Most unusual - Clay Gallagher of Nelson (it came with a picture of an X-ray!): Last week I had urgent back surgery and am now a modern day terminator! I have six months rehab with plenty of reading time!
• Sharing - Dave Flett of Tauranga: Love your books. Since moving into Bethlehem Shores Village, we share books with like-minded friends. This book would be read many times over.
• Made me smile - Dean Wensor of Western Springs: My wallet’s emptier than the list of welcome committee members for Donald Trump’s next visit to China. Time for some good old Kiwi money wisdom!

Other winners are: Gillian Cooper of Point Chevalier, Carley Nicholson of Torbay, Amanda Reelick of Devonport, Vikramjeet Singh of Flat Bush, and Kurt Wilkinson of Queenstown. Your books are on their way.

* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.