Gifts vs Loans: a thoughtful approach to protect your family’s financial future

As interest rates and the cost of living continue to rise, it’s becoming increasingly common for parents to step in to provide financial assistance to their children. Before you decide to help out, there are several key questions for you to ponder:

1. Is there any expectation for repayment? Should the repayment occur during your lifetime or be dealt with on your death?
2. Would you prefer the money advanced to be taken into consideration during the distribution of your estate?
3. Are you giving the money with no expectations of repayment either now or in the future? Have you considered the risks of giving the money with no strings attached?

‘Gifting’ money: documentation and risks involved

Gifting money carries no expectation of repayment. This might seem like a straightforward and generous option, but it carries significant risks that can impact both you and your children:

• If your child goes through a family law separation, any gifted money will be considered in the property division.
• If you child becomes bankrupt, a trustee in bankruptcy could claim this money to pay creditors.
• Disputes can arise after your death about whether the money was a gift or a loan.
• There could be financial risk to you as there’s a possibility that you may need the money later in life.
• Additional risks include your child suffering from addiction, a mental condition, or even ceasing to maintain a relationship with you.

If gifting still seems like the appropriate option for you, then you may wish to record this in a Deed of Gift. This is a legal document that can be prepared when one person makes a gift of money without imposing any conditions on the gift. Documenting the gift can help reduce any ambiguity about whether the gift was in fact a loan.

The benefits of ‘loaning’ money

If there’s any expectation of repayment or consideration during the distribution of your estate, it’s important that you document the transaction in a loan agreement.  This approach can offer several advantages, although it always depends upon the circumstances:

• Potential protection for your money if your child becomes bankrupt or goes through a family law separation.
• Ability for you to ask for your money back if you need it.
• Ensuring there are no unfair advantages among your children.

In your loan agreement, you can document the amount owed, the terms of repayment, and any other conditions. In order for a loan agreement to be effective, it must be a genuine loan (not just a gift under another name), and its terms must be complied with.

It’s a good idea to have the loan agreement drafted by a professional who understands your priorities, and for everyone involved to obtain independent legal advice about the agreement.

A case study

Lisa is recently married and is looking to purchase a home with her new husband, Ben. Lisa’s parents, Daniel and Michelle, want to help by contributing $250,000 toward the purchase price.

If the parties enter a Deed of Gift, Daniel and Michelle would be foregoing their rights to claim the funds back from Lisa and Ben. If Lisa and Ben separate, the funds would be taken into consideration in their family law property division.

The parties could alternatively enter into a loan agreement that requires repayment either on their death or if the property is sold or transferred, for example. When Lisa and Ben later decide to ‘upsize’ and sell the home, Daniel and Michelle would be entitled to be repaid their $250,000. If Lisa and Ben separated, the loan agreement could increase the chance that the $250,000 would be protected in their family law property division.

Estate planning considerations

Regardless of whether you choose to ‘gift’ or ‘loan’ money, it’s a good idea to make sure your estate planning documents reflect your arrangement, and that any relevant documentation can be found by the Executors of your estate.

We often recommend recording gifts or loan arrangements in your Wills so that it is clear to everyone what the expectations are when it comes to the distribution of your estate. You may wish to specify that a particular gift is to considered as part of your estate distribution, or alternatively direct your Executors to disregard the gift.

Conclusion

Navigating the complexities of financial support for your family requires careful thought and planning. Whether you choose to gift or loan money, understanding the implications and documenting your decision is crucial for protecting both your interests and your family’s future. Proper documentation clarifies your intentions and helps prevent misunderstandings and disputes down the line.

If you’re unsure about the best approach for your situation or need someone to draft or advise on legal documents, our experienced team of lawyers is here to guide you. Please call us on 9063 0300 or send us an email to discuss with one of our lawyers, or click here to make an appointment.