The concept of the “Bank of Mum and Dad” is one that has been frequently aired in the mainstream media in recent years.  The practice of obtaining financial assistance from parents or relatives has assumed prominence because of the rapidly rising prices of real estate in Australia and a community perception that, without such assistance, younger people may be unable to secure a foothold in the market.

If you are considering providing money to a family member or to a friend you should consider documenting the arrangement as a loan even if your present intention is not to seek repayment.

There are a number of factors which recommend this approach:

  • Although your present intention may be to gift the money, based upon your own present financial position, no one has a crystal ball to enable them to predict what their finances will be like in future.  It may be that a decline in your fortunes or a serious decline in your health may necessitate recovery of some or all of the money you have advanced.  Absent a documented loan agreement it is likely that any advance made to children will be treated as a gift due to a principle of law known as the presumption of advancement.
  • Similarly, particularly if you are advancing money to a family member or friend who is married, you may not intend that the spouse of that person should benefit from the advance if the marriage ends.  If a documented loan is in place the funds you have advanced won’t be treated as divisible property in any family law dispute.  The money due to you will need to be repaid from any net assets before division between the parties.
  • In a similar vein, the financial circumstances of the person to whom you are advancing the money may alter for the worse in future and they may be at risk of being declared bankrupt.  If loan documentation with appropriate security was in place the money you have advanced may not be lost to creditors.
  • Finally, if perhaps a little cynically, you may find that the relationship you have with the person you are assisting is better balanced in your favour if the funds advanced are by way of loan rather than gift.  Unhappily the treatment accorded to Shakespeare’s King Lear by two of his daughters to whom he had made gifts of almost his whole kingdom should not be overlooked.  You may recall  that their fawning behaviour towards him when a gift was being sought turned to contempt and estrangement once the gift had been made.  Even if you don’t intend to ever seek repayment, the ability to recall for repayment often tempers the behaviour of those who are to take the benefit of your bounty.  This is particularly so when you are dealing with family members with whom you might have had a troubled relationship in the past.

In all of these cases you can provide for a forgiveness of the debt in your will to ensure that the recipient of the advance is not financially burdened once you are gone.  If you or your friends or family need assistance in relation to any aspect of family arrangements or estate planning please contact us on 9525 8688 or email wmd@wmdlaw.com.au.  We also invite you to download our free Estate Planning eGuide.