In an environment of declining housing affordability, more parents are helping their children out by financially assisting them in their housing purchase. When deciding on the best way to assist a child financially, there are some important matters you need to consider:
· Do you want to provide money as a loan or as a gift?
· What will happen to your money if your child breaks up with their partner?
· Will you be repaid? How will you be repaid?
· Do you need a formal agreement?
Seeking professional advice early will ensure that everyone understands the terms upon which the financial assistance will be provided and it can prevent costly disputes arising in the future.
It is common for a dispute to arise in relation to whether money received from family members was a gift or a loan. Once this question arises, people’s recollection of the arrangement can be challenged. In such circumstances, an agreement which clearly states the parties’ obligations can often prevent costly litigation.
Should I provide assistance by way of loan or gift?
Gift: A gift can be a great way to help out a family member if you have the financial means. However, if you gift money to a child who is in a relationship and that relationship breaks down, gifts will usually be considered part of the family assets. This means that any money you gifted will be available to be divided between your child and their former partner.
Loan: A loan is a legal liability and may be viewed as a joint debt of the relationship. If your child’s relationship breaks down, it is likely that the balance owing on the loan will be required to be paid out of assets available for division between the parties.
How do you ensure that the money you provide is seen as a loan and protected?
You should:
1. Have the agreement in writing;
2. Express a clear intention that the money will be repaid and when;
3. Enforce the terms of the loan;
4. Clearly state the reason why the money was given as a loan.
A formal loan agreement also sets the standard that you are entering into a financial relationship with your child and signals to them that they have a commitment and legal obligation to repay the loan.
Seeking the advice of a lawyer when preparing a loan agreement will help ensure the agreement reflects your intentions. A lawyer can also give you more detailed advice regarding the effects of a loan or a gift to a child in your particular circumstances. You should also ensure that you obtain appropriate tax advice before any money is advanced.
If you have any queries about lending or gifting money to a child, please contact our team on (02) 9525 8688.
