My Other Half

[pjb89]

Hi all

We have recently contracted to purchase a duplex unit for an investment and prior to signing the contract and arranging finance etc we asked our accountant whether or not the IP should be in both names or one and whether or not the mortgage should also be in one or both names.

Upon inspection of the numbers of the 'deal' by the accountant we were advised to put the contract for the property in my name only, due to my high income and the future intent of my wife not to work so as to maximise the taxable deductions etc, and to obtain the mortgage in joint names as we were to use the equity in the PROP (that was in joint names) to obtain the finance.

We expect to settle in the next few days and the bank has inlcuded a clause in the loan documents that requires my wife to seek separate legal advice about her legal position or lack thereof prior to the settlement of the IP.

My wife now informs me that her solicitor says that she has ABSOLUTELY no legal standing with regards to this IP which is definitely not what our accountant explained to us. She is totally liable to pay the debt if I default, cannot source tenants, cannot sell the IP etc etc.

We were told by our accountant that by putting the contract in my name I would benefit from the taxable deductions etc (from the taxman's perspective) and by putting the finance in both names, my wife would have a legal postion to claim half of the IP if things ever went south in our relationship. This does not seem to be the case at all.

Apart from setting up a trust initially, has anyone got any comments about this situation? Is this normal?

Pedro

 

[geoffw]

Pedro,

A couple of things here.

It looks as if you are using your home (second mortgage perhaps? Or guarantor?) as security on the other property. It's probably too late now, but if you had taken a Line of Credit (LOC) loan against your house, you might have been able to use that LOC loan as deposit against your IP. The difference can be more than academic. If you are borrowing more than 80% of the combined values of two properties, you will be assessed for Mortgage insurance on the combined value of the two properties. If, instead, you have borrowed against your house (up to 80%), and used it to borrow, say 90%, on your IP, your MI may well be smaller. And you would also have been able to avoid the solicitor talk!

It is the responsibility of a solicitor to give the worst possible scenario, even if highly improbable. If, in the worst of all possible worlds, everyting the solicitor predicted happened, but you had not been informed of some of those possibilities, you might have then had grounds to sue the solicitor.

We've just recently gone through this (The LOC road did not work for us as Mortgage Insurance was refused on a block of flats). The solicitor went as far as to say that, if my wife had been married a little less than out 14 years, she would have highly recommended that my wife refuse to guarantee.

I don't know if there would be a difference if you were joint tenants in common (1% to your wife, 99% to you). It might be worth while checking out- but I don't know of details/benefits/downfalls etc.

Sorry, you did mention trusts, and I'm not helping by mentioning them. For me, the trust gives an extra anount of flexibility, especially with distributing income. If a negatively geared property in my name became positive after a few years (as I expect it would), I'm going to be bearing an extra tax burden. A trust would have given me an option to distribute to different beneficiaries as circumstances changed. I wish I'd known about trusts a few years ago.

 

[Lily House]

Hi Pedro,

Possible Problem 1:I would not wish it on you but say sometime in the future you and your wife seperate. You wife is worried you will walk away with the ip and she gets nothing. I would suggest that, as a married couple, in the event of a divorce you would both be entitled to a share of any assets you have acquired since you have been together, regardless of whose names they are in. (Disclaimer: I am not a lawyer)

Possible Problem 2: You are happily married as expected but you suddenly loose your job or whatever. Yes the bank will look to your wife to help with the mortgage. But as a couple, wouldn't you be looking to solve the problem together anyway? You either come up with the cash between the two of you, or worst case scenario you are forced to sell. Yes you should think about if things go wrong, but things like income protection insurance or rent insurance can help you sleep at night.

If you have a strong marriage and are comitted to building your wealth together, you just have to trust for the best.

Good Luck.

Lily

 

[pjb89]

Thanks for the reply guys....

Geoffw we did take out a LOC against the equity in our PROP and yes I am definitely wishing that I had investigated trusts more fully as I am quickly coming to the conclusion that this structure might have been beneficial.

The mortgage on our PROP and the IP are with the same lender.


Pedro

 

[Jas]

I would check this against the family law court. In many cases, they pull apart sole ownership and distribute it equally (regardless of titles). Superannuation is a good example of this.

Jas

 

[TheBacon]

Risk-reward

The lawyer (and banks for a change) gave good advice to your wife. There is risk involved for her (his client) if things proceed the way you had originally planned.

However your wife has safeguards, if (and I pray it never happens) you separate she will be entitled to her fair share of your combined assets.

The risks to her in this situation are a more complicated divorce/separation settlement. I contend that this would be small compared to the pain of a divorce.

The rewards are more cash in your pocket for the rest of your lives together.

You have to trust someone sometime. I trust my wife with everything I have and she does the same with me. If we get rich or go under we do it together. My advice to your wife is to thank the bank and lawyer and proceed.

Getting unusually emotional.
TheBacon

 

[pjb89]

Thanks for that TheBacon,

I know that I trust my wife 150% and always have, but it was disturbing to find out that she is not entitled to ANYTHING (so her lawyer says) and she has no rights at all which is contrary to the way that I wanted the whole IP thingy to go.

I know that if I was in her shoes and I had no rights whatsoever, it wouldn't worry me.....but I would just like to 'make it right' and so will seek further legal advice early next year.

I don't want to get all emotional either, but when you plan to spend the rest of your lives together, you want equality in all areas of the relationship and this is just part of the whole ultimate trust thing I suppose......(as he wipes a tear from his eye)...


Pedro

 

[Aceyducey]

To maintain equality you could always buy the next property (positive geared this time) in her name

It would probably also be a good idea for you to both ensure your wills are up to date.

Sometimes the disposition of assets in a single name (or even in joint names) can get a bit complicated if the person dies and there is no will or only an old one.

A post-nup is also an option - not due to lack of trust but as a legal safeguard.

Cheers,

Aceyducey

 

[voodoo]

Hi pedro,

My wife and I have a house that we live in, we are paying it off with a line of credit, portfolio loan thru St George bank and the house and loan is in both names.

I have just purchased another IP and it is set up like this:

For the IP, I took out a sub account from the portfolio loan and borrowed the full amount in my name only and it is an Interest only loan.
I also put the property in my name only, for better tax deductions.

but

My wife had to get an independant solicitor so that she fully understood what was happening. (the bank requested this)

That soilicitor explained to my wife that she is guarantor for my loan, and if anything happens to me or what ever, she is then responsable for that loan and the IP.

so your wife is entitled to half and responsable for all, thats how i see it...



regards

 

[pjb89]

Hiya voodoo

Your situation sounds the same as mine except her solicitor has informed her that whilst she is effectively a guarantor for the loan she has NO legal claim whatsoever which is the discerning part of the deal for me. It was always the intention that the IP be set up so that she had an equal share in the property but I could claim the tax deductions as I am the one who can benefit most.

I think I will see a solicitor and discuss this further...

Pedro

 

[pjb89]

oops...sorry voodoo my loan is in joint names not my name only and the IP contract is in my name only (to allow me to claim the tax deductions.....

good point about the pos cash flow IP though......I was thinking along those lines myself as the 'boss' wants some property in her name anyway. I think she is feeling left out..hehehehehe