The Cost of Not Formalising Financial Arrangements

When you’re making big financial decisions — especially with people you trust — it can feel unnecessary to “formalise” things….

But as circumstances change, those informal arrangements can quickly unravel. Here’s what you need to know to protect yourself from unintended consequences.

First Home Excitement

Sylvie and Jack were excited about buying their first home. Sylvie had saved hard and had a significant KiwiSaver contribution. Jack had his KiwiSaver, but no other savings. They had almost enough for their deposit, but Sylvie’s parents offered for their trust to lend them some funds on an interest free basis to top up their deposit so that they would get more favourable interest rates with the bank. After months of just missing out on properties, Sylvie and Jack finally found a property that ticked all the boxes, and they were able to secure it.

Bank Requirements And Gifting

The mortgage broker told Sylvie and Jack they needed to tell the bank where the extra trust funds had come from. Sylvie said the money was a loan from her parents’ trust, but the broker advised that the bank would not accept loaned funds as part of their deposit and would instead require the trust to sign a deed of gift. Sylvie’s parents were prepared to sign whatever was needed to help the kids out.

Choosing Not To Formalise

The lawyer acting on the purchase of the property asked Sylvie and Jack if they wanted to make sure that their separate contributions to the property would remain theirs if they separated. He said that the only way of doing that would be to enter into a contracting out agreement (like a pre nup) where they would agree that if they separated, they would get back their initial deposits rather than the whole property being shared 50/50. Sylvie and Jack didn’t want to spend the extra money to prepare the agreement and pay for a separate lawyer each to give them independent legal advice, so decided to not do anything.

Seven Years Later

Fast forward seven years, Sylvie and Jack had been having problems for some time. Sylvie was keen to get married and have a family, but Jack didn’t want to be tied down and was still enjoying late nights out with his mates. Things came to a head and the young couple decided to separate. Sylvie wanted to stay in home ownership whereas Jack was going to head overseas with a couple of his mates. Sylvie’s parents said that they would, once again, help her buy out Jack from his share in the property.

Dispute Over Contributions

Sylvie got a local real estate agent to value the house and put a proposal to Jack to buy him out of his share in the equity. She used their original contributions in the calculation, but divided the equity gain equally. She also added in what they owed her parent’s trust. She told Jack that he should get his own legal advice.

The Legal Reality

Unfortunately for Sylvie things then went downhill. After taking legal advice and being egged on by his mates, Jack said that the money lent from Sylvie’s parents trust had been a gift, they had signed a gifting document. He completely ignored the fact that it had always been intended to be a loan, because the law said as it had been signed off as a gift, it was a gift. Furthermore, he refused to acknowledge that Sylvie had put more in from her KiwiSaver and savings when they purchased the property. The law said that unless they had a contracting out agreement, because of the length of their relationship, those contributions would be divided equally.

The Consequences

Sylvie was naturally devastated. She bitterly regretted not spending the money on the contracting out agreement when they first purchased the property and her parents were annoyed that they had signed the gifting document at the behest of the mortgage broker and bank.

It’s easy to assume things will work out — especially when you’re dealing with family, partners, or trusted advisors. But as this situation shows, the legal position doesn’t always reflect your intentions. If you’re buying property, receiving financial help, or entering into any shared financial arrangement, taking the time to formalise it properly can protect you later. If you’re unsure where you stand or want to put the right protections in place, now is the time to get advice — before circumstances change.

CG Comment: As accountants we have seen the consequences of not having the correct legal paperwork in place. If you have any concerns, please feel free to contact us.

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