This article was published on 21 February 2004. Some information may be out of date.

QIf a house is left in a will to two children and they sell the house and divide the proceeds, can a proviso be included in the will to say that they must use the money in a particular way?

AIn most cases, “if a proviso is professionally and specifically drafted to cover the wishes of the deceased, then the answer is yes,” says Kevin Peacock, Public Trust’s general manager, estate and financial planning. In other words, see a lawyer or the Public Trust.

It’s possible, though, that the courts could overturn the proviso after you die, he adds. You could give yourself more control by setting up a family trust.

If you want your house to be protected by the trust, you lend the trust the money to buy the house at market value.

You can then forgive the debt at the rate of $27,000 a year — or $54,000 for a couple — without paying any gift duty.

If the gifting programme is completed before you die, the house will be owned debt-free by the trust.

But let’s say your house is worth $400,000 when you set up the trust, and you gift $27,000 a year for ten years, and then die. The trust will owe you $130,000 ($400,000 minus the $270,000 you have forgiven).

That $130,000 becomes part of your estate. You could gift that amount to the trust through your will, free of gift duty. But, says Peacock, “because it’s still part of your estate, it may be subject to a claim from your heirs.”

You could, of course, speed up the gifting programme and pay gift duty. But most people aren’t keen to hand over extra tax.

If you decide the family trust is the way to go, the sooner you set it up, the better. There’s a bigger chance you’ll complete the gifting programme before you die.

And, Peacock points out, the trust’s debt to you is the market value of your house when the trust is set up. The way house prices are going, quick action is called for. (It is, of course, possible that house values will fall. But let’s not get into that here.)

In the trust documents, you could direct the trustee to sell your house when you die and hold the proceeds on certain terms and conditions, says Peacock.

Perhaps, for example, the trustee would give your kids money only for medical or educational purposes. Or the money might be held until they turn 30, or 45, or any specified age — perhaps allowing for distributions in the meantime only for medical or educational purposes.

If you want your children to spend the money on a house or other asset, things could get tricky. Your son or daughter might buy a house, and then sell it a year later.

To prevent that, the trust could buy the house and let your child use it, or give the child an interest-free loan to buy a house, with the loan repayable if the house is sold, says Peacock.

By the way, such an arrangement can get around the problem of the inheritance becoming relationship property that would be divided if your child and his or her partner separated.

Head spinning? Mine is, writing all this!

It would be much simpler if you could just talk to the children and get their agreement on what they would do with the proceeds. Only you know whether you can trust them to keep their word.

QI am planning to invest $NZ1 million for two years to qualify for a New Zealand visa under the Investor category.

My question is, “What is the best kind of account to invest in for this period of time?”

We must invest the money in a single account for a full 24-month period, and it must be in the trading bank system.

Any suggestions on where to look to find the best option, and any good tips?

ABefore other readers complain that many of the letters in this column are about rich people’s problems, let me point out that someone with a lot less to invest for two years is in much the same situation.

In your case, you must use a bank. But in any case, a bank term deposit is probably the best choice for two years.

In shares or property, there’s too big a risk you will lose money over such as short period.

Fixed interest investments that pay much higher than term deposits are also risky. And while high-quality corporate bonds carry little risk, their returns are probably not high enough to warrant the hassle and expense of buying and selling over just two years.

Back to your question. All our banks are financially pretty sound. So go for the highest return.

The websites and list interest rates paid by the various banks — as well as other finance companies.

At the moment, with rates trending upwards, you’ll get higher interest for two years than one.

You might find, though, that rates rise more than currently expected, and you would have been better off with a one-year deposit that you then renew for another year. Then again, if rates rise less than expected, that would be a bad strategy. Perhaps you should put some money each way.

Note, too, that with such a large sum of money, some banks may give you a higher rate than the one quoted for, say, $50,000 and above.

I suggest you find the three banks offering the best returns, and get in touch with each to see what you can negotiate.

And welcome to New Zealand.

QI’m 28 years old, living at my family home with no debt and $40,000 saved in my bank account. I earn $55,000 a year.

I would eventually like to buy my first house when I’m around 30 years old, once I have travelled a bit more.

I have little idea about how to invest this money wisely, hoping for the best possible return for when I’m 30 years old. Could you give some advice please?

AAt first glance, you seem to be in much the same situation as the person above, with money to tie up for a couple of years.

If you’re quite sure you want to buy your first house in about two years, I think that you, too, should stick with term deposits.

And you might also consider splitting the money, with some deposited for two years and some for one year, with a plan to roll over the second lot for another year.

It sounds to me, though, that you could be a bit flexible about when you buy your house.

Let’s say you put the $40,000 into a share fund. That’s a riskier investment, but it has the potential to earn you a higher return, possible much higher.

In two years, if you’re lucky and your money has grown fast, you could go ahead and buy the house.

If it has grown only slowly, or shrunk, you could leave the money where it is for a few more years, in the expectation that it will probably grow eventually. Or you could tell yourself, “That’s the breaks”, and buy a house anyway, with a smaller deposit.

Let’s look at the chances of your losing ground in a share fund?

If you invest for two years, there’s a 1 in 4 chance you’ll lose, according to BNZ Investment Management.

But if you hang in there for five years, it drops to 1 in 9. And, over ten years, it’s 1 in 76.

If you want to improve the odds, you could invest half in a share fund and half in fixed interest, such as term deposits. If the share fund does badly, that will at least partly be offset by positive returns on the fixed interest money.

The chances that your $40,000 would drop over two years in a half-in-half investment are 1 in 14. Over five years they are 1 in 72, and over ten years they are 1 in 4506.

In other words, you’re pretty much guaranteed that — even in a worst-case scenario — your house deposit would grow over ten years.

The downside of a half-in-half investment, though, is that the potential returns aren’t as high. If the sharemarket happens to soar, you’ll get only half the action.

So what’s it going to be? A safe bet in term deposits; an intermediate play; or the whole hog, in a share fund?

If you do either of the last two, you must promise yourself you’ll stick with your strategy, even if the sharemarket dives.

Too many people got out of investments that included international shares when they plunged in 2001 and 2002. They are no doubt cursing that decision, after watching the markets recover since then.

As I’ve said so many times before, investments in shares or a share fund should be for the long term.

Picture your $40,000 turning into $35,000, or even $25,000. Will you have faith that it will rise again? If yes, go with a share fund. If no, stick with term deposits. If you’re wavering, try the half-in-half idea.

QLet me tell you a story in response to the recent letter about the young couple who have bought a lifestyle block at Waipu. It’s about the difference between knowing what you don’t know, and not knowing what you don’t know.

My partner and I searched long and hard for a piece of land that we could retire to. We found one close to Auckland, with native bush, a stream, reasonable soil for gardening and a great building site.

We were told the farmer was selling because it was awkwardly located. Also, by subdividing and removing stock, the farmer was protecting a “significant natural area”. It appeared perfectly reasonable.

Nothing we discovered during our due diligence — which included ploughing through council files — dampened our enthusiasm. We bought, we planted, we planned our house.

Six months later the company leasing a small quarry down the road informed us it planned to expand production from 10,000 cubic metres a year to 560,000.

At the same time we discovered the council had placed our lifestyle block into a quarry buffer zone in its proposed district plan. If the quarry company had not done enough to wipe any value from our property, the council certainly had.

That proposal has been replaced by another, for 280,000 cubic metres a year — still enough to make the quarry a massive industrial site and our land unliveable.

What we did not know we did not know was that the council knew an application was being prepared for the quarry expansion when it approved the subdivision. It had received the resource consent application at the time we did our due diligence but, because the application was still being processed, it was not obliged to tell us.

The vendor knew. In fact, the quarry company had consulted the vendor and even offered to buy the land. The offer was refused.

All that happened more than three years ago. We have made submissions on the resource applications and the proposed district plan. We are still waiting for hearings, which will almost certainly be followed by appeals to the Environment Court.

I guess we can look forward to another three years at least before there’s a certain future — good or bad — for our land.

My point in telling you the story is this: if you know you don’t know something, you can always find out by asking the right questions of the right people. It’s what you don’t know you don’t know that can trip you up.

AAnd my point in running your letter is that it’s a sad example of what can happen in property investment.

I don’t know if you’ve put most of your savings into the land. I hope not. But many people do concentrate all their efforts on a single property.

Usually, the adage that you can’t go wrong with land is correct. But stories like yours are not all that uncommon. Being undiversified is risky.

It sounds as if you’re exploring all the ways you can change the situation. I presume you’ve consulted a lawyer. If not, I would do so right away. You’ve got too much to lose.

Thanks for giving others a warning. And good luck with the hearings.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and 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 [email protected] 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.