Many of us will inherit a share of the family home. I decided to look into the financial implications after watching a clip on TV about a woman who had lost all the proceeds from her mother's house.
The woman in question fell for a fast-talking Nigeria-based Lothario who conned her out of her inheritance, supposedly to help him solve a business dispute.
Lo and behold, he never turned up in New Zealand to live happily ever after with her as promised and the money vanished.
An inheritance can be a real godsend. As Trade Me member "Asue" said: "I received an inheritance; and every day I appreciate it as it has made my life so much easier and it reminds me so much of the people who left it to me and how much they loved me."
Inheritances might be just money or property to some people, but to others they have deep psychological significance and might lead to family disagreements or worse.
A sibling or other beneficiary of a person's will may feel that they have done more to help a parent and deserve a greater share of the inheritance.
Or they may believe that other siblings received more financial help from the parents and feel this should be evened out in the will.
AUT University senior lecturer in psychology Dr Elizabeth du Preez says an inherited property will be a physical reminder of the relationship between parent and child, and dealing with it may be harder if there are unresolved emotional issues. "If it was a complicated relationship it may well make the decision more difficult," says du Preez. Or children read into the will how much they were valued by that parent.
Siblings may react differently to each other over the inheritance question, she adds. "They will not all have had the same relationship with that person." Some children want to hold on to the family home as a reminder of the relationship while others may be indifferent or want to get rid of it.
Choosing to keep the property to live in or rent out can be problematic. As soon as you move into the home, even for a day, says trust lawyer Ross Holmes of Ross Holmes Lawyers, it becomes relationship property, whether or not it's owned by a trust. This is a vivid illustration of why a parent with only one child should be considering setting up an inheritance trust. What's more, the old family home doesn't always make a good rental property. It may be run-down, dated and in need of modernisation. Letting it as-is will not bring in a good class of tenant.
Upgrading it, on the other hand, isn't always a good financial option. That work isn't tax-deductible, says Joanna Doolan, partner tax at Ernst & Young. Although maintenance is tax-deductible, "dilapidation repairs" aren't, says Doolan. Anyone who tries to pass off those repairs as maintenance risks being caught for tax avoidance.
Sometimes one sibling buys out others only to find the property isn't worth even the government valuation because of the amount of work that needs doing, says Raewyn Fox, chief executive of the New Zealand Federation of Family Budgeting Services. It's worth getting a builder's assessment before raising a mortgage on it, says Fox. It might need too much work or have a fiddly garden that goes to rack and ruin with a bunch of students living in the house.
It's always wise to take advice from an authorised financial adviser, says Jeff Matthews, senior financial adviser at Spicers Wealth Management.
Matthews dealt with one case in which a client had inherited a property. She wanted to use the proceeds to pay down the mortgage on her rental property. Matthews pointed out to her that the return on the rental property was 4.25 per cent, whereas she could get 7.5-8 per cent return on a bond at the time.
The client would have been better off claiming rental losses on the property against her other income and taking the return from the simple fixed-interest bond investment.
Both Matthews and Doolan recommend using any inheritance to pay down consumer and mortgage debt first. If, for example, you're paying 6.5 per cent interest on a $100,000 mortgage, by paying it off you're getting a tax-free return equivalent to investing it at about 9 per cent interest.
Many children become accidental landlords when mum and dad die and aren't necessarily cut out for the job. First of all there is the problem that they may be emotionally attached to the property and breach a tenant's peace, comfort or privacy by turning up all the time or failing to give notice of inspections. Or they may simply be personally offended by the way the tenants treat their parents' former home.
Sometimes coming to agreement with siblings over how the property and tenants are managed can lead to disagreements or bitterness.
Doolan has another point. "[The siblings] need to consider who they think is going to be the government next time when making the decision because of Labour's capital gains tax proposals. Any second house will be subject to capital gains tax when they ultimately sell the property."
One of the big issues facing people who inherit property is the Property (Relationships) Act 1976. An inheritance is viewed as separate property under the law. It's a case of "what's mine isn't necessarily yours".
If you mix the inheritance with relationship property in any way, such as using some of the proceeds to pay off a jointly held mortgage, it will no longer be viewed as separate by law. "In that case you've committed hari kari," says Holmes.
He recommends clients do one of two things. The parent can add to their will that the inheritance will go to the child's trust if they have one. Or the parent themselves can set up an inheritance trust going to children and secondary beneficiaries such as grandchildren.
If the money is going to a child's trust, it should be an individual trust, not a family trust with the spouse or partner, says Holmes. It's a good idea to accompany this with a pre-nuptial agreement if possible to contract out of the law.
The trust route protects the inheritance from children's ill-chosen or acquisitive spouses and partners. It also protects the money from business creditors because it never actually belonged to the individual. It was passed from the parent's estate to a trust. "This reassures the parent that the child is getting the money safely," says Holmes. That is providing the trust is managed correctly.
There are, of course, many cases where the beneficiary is happy to pay an inheritance into the family pot and clear the mortgage, buy a bach or boat, or take a family holiday. If they stay together for life there is never going to be an issue.
From a financial perspective people shouldn't bank on inheriting the family home, says Matthews. "It's a bonus." Parents are entitled to spend their wealth on the things they went without while bringing up a family and building a nest egg. Or maybe they want hip replacements, better dentures and top-of-the-range hearing aids. They deserve them.
Sometimes the hard-earned money they saved to pass to their children is eaten up by residential care costs. Or it may be that older people, without their children's knowledge, have mortgaged their property with lifetime/home equity loans and there is no capital left.
Children should also be aware that the Property (Relationships) Act 1976 takes precedence over inheritance laws, which means if mum or dad have entered a new relationship the partner will most likely be entitled to the home if the couple haven't contracted out of the act with a pre-nuptial agreement.