A better way to lend money to family members

Generosity meets Responsibility. Before borrowing money from a friend decide which you need most. Generosity meets Responsibility. Before borrowing money from a friend decide which you need most.

Generosity meets Responsibility

Many parents who are able to help their children get into the property market find themselves in the difficult situation of having to choose whether they are 'gifting' or 'lending money' to an adult child.

Jump Ahead

Case Study

Meet Terry and Jo and their two adult children

This was the situation that Terry and Jo faced when their daughter Julie and her boyfriend wanted to buy their first home together. The mortgage lender's insurance fee (LMI) would be about $26,000 because their saved deposit was only 5% so her parents added $125,000 to the deposit from their own savings to help them get started.

  • Four years and five months later, Julie and her partner separated and the house was sold.
  • A claim was made on the house by Julie’s former de facto partner for half its value, even though Julie's parents had gifted the first $125,000 to help their daughter get started.

What could Julie's parents have done differently to stop them from losing their $125,000 in the Family Law Court financial settlement?

Debts are considered to be property and therefore an asset of the Creditor. As such, they can be forgiven or assigned to another person by its owner.

  • A written Parent Loan Agreement can protect both you and your child.
Don't make financial gifts to children, make formal loans so if your child divorces or goes bankrupt, you can call back that money.Prof Brett Davies Barrister

Many modern Australian families are using a Parent Loan Agreement to protect both parents and their child from future unforeseen financial consequences.

How does it work?

Simply put, with a written Parent Loan Agreement, parents can recover the money lent if their child:

  • goes bankrupt
  • divorced
  • becomes mentally unsound or
  • suffers an addiction-related condition.

If the child finds themselves in one of these terrible situations, the loan can be called in by the parent and the Family Court can deal with that amount as they would any other loan and not consolidate it into the family wealth and subject of a financial distribution order.

What can a Parent Loan Agreement do?

Parent loan agreements can be very flexible.

  • They can state exactly how much is loaned, when and how it is repaid, and any interest rate.
  • They can make the loan payable 'on demand'.
  • They can also start charging interest at any time.
  • If the rate is set @ 0% there are no tax consequences

What can a Debt Forgiveness Agreement do?

When you no longer want to treat it as a loan but a gift, you can forgive the debt.

Like holding assets in a Testamentary Trust to protect the asset, providing significant financial assistance first as loans, can help protect that financial assistance until a time when you may wish to formally forgive the loan debt and issues a statement of Debt Forgiveness for 'love and affection'

It's not limited to just loans for a home deposit

Many families providing higher education assistance find a Parent Loan Agreement useful too.

For example;

  • Terry loaned his son David $30,000 each of the 5 years he was at University.
  • Now David owes his father $150,000.
  • Terry was happy with his son's hard work and chose to forgive the debt.
  • This may have CGT, income tax and stamp duty implications.
  • Instead, David forgave the debt by using a legal Deed of Debt Forgiveness.
  • As the debt was forgiven for 'love and affection' there are now no tax issues.

In today’s modern family, we all need to be aware of the better ways to live our financial lives and protect our hard earned money and those we’re responsible for.

Pro Tip: Parents using a Parent Loan Agreement to safeguard significant amounts of money and Deeds of Debt Forgiveness often keep a personal record of the amount and also give a copy of the agreement to their financial adviser to hold for further safekeeping, along with estate planning and insurance policy statements, just in case.

The government's Money Smart website has an interesting article about smart ways about lending money to family, here.

If you’d like to know more about Parent Loan Agreements and Debt Forgiveness, contact us for a confidential chat, here to see if we can help you with your situation.
Drew Browne

Drew specialises in helping people protect and provide for what matters most in their lives. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His company Sapience Financial and Investment Services is committed to using business solutions for good in the community, and in 2015 certified as a B Corp. In 2017 Drew was recognised in the inaugural Australian Westpac Businesses of Tomorrow national awards. Drew writes for successful Small Business Owners and Entrepreneurs at Smallville, his blogs can be read on Amazon.com and you can connect with him on LinkedIn.

Any advice provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.

drew browne pic

Drew Browne

Sapience Founder & Director.
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