Properties in Australia are becoming increasingly expensive. This means that many young couples with families are often unable to afford to purchase a home without some financial assistance being provided by their parents. As a result, many parents are being asked by their children to provide some financial assistance to their children.
This raises several interesting legal questions.
Should a parent gift money to their children or should they loan this money instead? Does a loan or a gift need to be registered in a formal agreement? What happens if there is no formal agreement?
Who decides whether a transaction between a parent and a child is a loan or a gift? How are disputes and disagreements resolved? What happens if a parent gives money to their children and then their children get divorced or separates from their de facto partner? Can this money go to the children’s former partner? What happens if there is a falling out between the parents and the child? What happens if the child starts to experience financial or insolvency problems?
In short, what can parents do to protect any money that they lend or gift their children?
Loans vs Gifts
As a general rule it is normally safer for a parent to loan their children money rather than giving them this money as a gift.
There are a number of reasons for this. Firstly, making an advance as in the form of a loan ensures that the parent has some right to have this money returned to them. It ensures that the money is protected in the event of a dispute between child and parent. It also often creates an additional incentive for children to maintain a strong relationship with their parents.
Secondly, in the event that a child experiences a divorce or break-down of a long term de facto relationship then money which has been loaned to a child will not form part of any property settlement in a family law dispute. Money that has been gifted to a child by a parent is always in danger of being redistributed by the court to the child’s former partner – particularly if the former partner has the custody of young children or is experiencing some financial hardship.
Thirdly, the fact that an advance of money is made in the form of a loan rather than a gift means that it is better protected if a child experiences any unexpected financial difficulties. Many parents who are making loans to their children also choose to have any money that they lend secured by a mortgage. The benefits of a mortgage is that it ensures the parents have a right to get their money repaid from any sale of a property before other creditors who don’t have a mortgage.
The Advantages of Gifts
There are a few advantages in a parent choosing to make gifts to their children instead of loans. If a parent is experiencing financial problems or is worried about potential creditors making claims against them then making a gift ensures that the money will not be claimed by these creditors. Similarly, if there is a risk that there will be a claim against a parent’s estate (e.g. where there are step-children or a second marriage) then it may be better to make a payment in the form of a gift rather then a loan as this ensures that the money is not part of the estate.
The Importance of Documenting Agreements
One of the most important things that parties who are advancing large sums of money is to ensure that any transaction is properly documented. Some of the reasons for this is include:
- the parent and child may misunderstand the terms of agreement;
- the parents and child may forget or become confused as to the terms of the agreement over time;
- it creates clarity as to when money needs to be repaid;
- it creates clarity about the consequences of failing to repay any money;
- it creates clarity in the event of the divorce or separation from a de facto partner; and
- should one person pass away, there is a clear record as to the terms of the agreement.
It is therefore extremely important that any significant advance of money be correctly documented in the form of a legal deed.
What happens when there is no written agreement or a dispute?
There is a legal presumption that any advances of money are gifts (and not loans) when they are made by from a parent to a child or between spouses.
In order to rebut this presumption a person needs to provide evidence to demonstrate that the transfer of money is a loan. This can be something as simple as an email or a written receipt of the transaction – however it is better where there is a legal contract that has been executed between the parties.
Other factors that a court will look at include:
- whether there has been steps to secure the loan (e.g. via a registered mortgage);
- whether there has been a loan agreement;
- whether a demand for repayment has ever been made; and
- the credibility of the parties;
If you would like to obtain additional information about loans and gifts then please give us a call on (02) 9982 1655 or send an email to email@example.com