One question we are advising clients on more frequently these days revolves around them wanting to help their children financially, but at the same time protect that money to ensure it stays in the family. Some interesting figures from 2017 pointed to family members, essentially the Bank of Mum and Dad, being the fifth largest source of lending in Australia behind the Big Four, at around $65 billion1.
Having the right strategy can make a big difference if something goes wrong, and play a significant part in determining if that money is lost, or can be protected and recovered.
What are the risks?
Two of the more common concerns we see are:
- what happens if there is a relationship breakdown?
- what happens if the business plans don’t work out?
Keeping it in the family
Giving money to children is a simple and easy way to help them out. However, once the money has been given, it is gone and there is no ability to get it back. This can cause many problems, including:
- creditors having access to those funds in the event of bankruptcy
- that gift being included in the property pool in the event of a relationship breakdown (which includes both marriage breakdown and de facto relationship breakdown)
- not being able to call the money back if it is needed in the future to fund retirement plans or future accommodation needs
Putting in place a loan agreement can assist in avoiding or reducing many of the issues with gifts. The key point is that the loan must really be a loan and not a gift. Ideally, a loan arrangement would include:
- a formal loan agreement document
- repayments being made on a regular basis
- security being taken over property
- an acknowledgement from the child’s partner that the loan is a loan, and not a gift
There are other practical matters to consider regarding loan arrangements, including:
- the potential impact the loan may have on a child’s ability to service an existing loan or obtain finance
- if any adjustments are required to your Wills to take the loan into account (this can be especially important if only one child is receiving the benefit of a loan)
Being able to help family members can be a great way to see them get into the property market or start their own business. Making sure you put the right arrangement in place is key. Putting in place a loan arrangement which requires security and repayments gives better protection. If you don’t loan it, you run the risk of losing it.