Do you have a client who is a member of the Bank of Mum and Dad?

By William Moore, David Dickens and Sam Baring

Many of your clients will be members of Australia’s fifth-largest bank. It’s not Bendigo and Adelaide Bank, it’s not Macquarie, it’s the Bank of Mum and Dad.^[1]

The rise and rise of the Bank of Mum and Dad can be attributed to many factors, including:

• a rise in accumulated wealth of Mum and Dad;
• continued increases in property prices, especially in capital cities; and
• a desire to assist children getting their toe in the property market, and getting a leg up in starting or running a business.

We have had many recent enquiries where Mum and Dad have been asked to act as guarantors for a loan or provide financial assistance to family members who are struggling. Therefore, we want to highlight the potential asset protection benefits of your clients formally loaning, as opposed to gifting, money to their family members.

Family law

Before providing financial assistance to family members, you should consider how best to protect that money from passing to their spouse in the event of divorce or separation. We have found that one of the best ways to do this is through a formally documented loan. As your children are required to pay the money back to you, the value of ‘available property’ to be split between them and their spouse in the event of a divorce will likely be reduced by the value of that loan.

The Family Court has a broad-reaching power to determine financial matters between parties to a relationship. However, a loan agreement, while not foolproof in protecting against a spousal claim, will give clients the best opportunity to keep those loaned funds out of the matrimonial property pool, and away from any former son- or daughter-in-law.

Bankruptcy and insolvency

If your children are at risk of becoming bankrupt, or a company they are a director of is at risk of becoming insolvent, you should think twice before gifting money to them. Any money you gift them will become their personal asset and be available to creditors.

A formally documented loan, coupled with security, can help protect an asset from passing to a creditor by giving you a priority over the asset to secure repayment of the loan. A common example is entering into a loan agreement with your children to lend them money to purchase property and taking a registered mortgage over that property.

It is important to ensure that the loan to your children is properly documented. There have been many cases where ex-spouses and creditors have successfully argued that an alleged loan is, in essence, a gift. It is also important to consider what security can be obtained for the loan and how this will fit in with other security over the asset. Types of security over real property include charging clauses, unregistered mortgages and registered mortgages. A caveat may also be lodged. It may also be prudent to enter into a priority deed with other secured parties, such as banks.

Finally, if you have already provided your children with money and are concerned that it is at risk, it is possible to enter into a loan agreement after money has been lent. Although it may not be as secure as entering into a loan agreement prior to providing the money, it still provides some protection. Taking security after money has already been lent is much more open to challenge.

The best way to ensure that any funds you provide your children are protected and considered a loan is to seek legal advice. Hall & Wilcox is continuing to assist clients in the current circumstances via phone or Zoom meetings. We are also able to witness the signing or swearing of documents via audio-visual means under modified provisions for the execution of documents.

[1] 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 billion.