two middle aged brothers talking at a family bbq
Family Loan Agreements protect our good intentions, because living in the moment has risks

Are you thinking about whether to provide a large amount of money to a family member?

Providing money for family members for a home loan deposit or an aged care accommodation bond is increasingly becoming a part of many people's lives.

But how do you protect the Giver and the Receiver from the unintended consequences of these decisions?

The answer is with a legally drafted and documented Family Loan Agreement.

How can you make sure you’re providing a blessing and not a curse?

The simplest way is to learn how to use a legally drafted and documented Family Loan Agreement — it's a precaution, not a plan.

  • Being generous with our money also brings a level of responsibility to do no harm, with an opportunity to model good money behaviors to our family members.

Read in this article

A precaution, not a plan

So why would you use a documented Family Loan Agreement?

Family Loan Agreements are designed to protect all the parties involved in a family loan.

Using a documented loan agreement is a smart way to protect the Gift, its Giver, and the Receiver, so if there is an unexpected problem in the future, a family ‘loan can be returned’ and avoid being captured by a Bankruptcy Trustee, caught up in a Family Loan Court financial order or lost to Addiction behaviours.

  • As a rule of thumb, never ‘give’ your children money – always ‘lend’ them money ‘payable on demand’.
  • Get it back if something goes wrong and never rely on a verbal agreement.

Creating a family loan agreement for your children

When you give a sizable financial gift, always wrap it in a Family Loan Agreement

  • it not only protects your interests, but
  • it protects your child by ensuring that in the future if something goes wrong the gift can be recalled, or the debt can be forgiven while you are alive or in your Will.

The easiest way to see the benefit of a documented Family Loan Agreement is to see what happens when one is absent.

Case study – Meet Alma, her favourite grandson, and his new wife he met 6 months ago.

case study meet alma, her favourite grandson and his new wife he met 6 months agoThe worst financial decisions usually are rushed ones

Some years ago Alma asked her financial adviser to arrange for the release of a large sum of money from her superannuation fund's pension account, to be paid to her grandson as a deposit for a new home for his new girlfriend.

  • The undocumented agreement from the new couple was, 'In exchange, Grandma can live with us, if she provides the deposit for the house'.

Against all strong advice, all three parties to this event:

  • refused to get financial counseling
  • refused to get independent legal advice on the possible outcomes
  • refused to consider creating a family loan agreement, and
  • refused to slow down and discuss how they all might want to deal with potential future conflicts if it didn't quite work out the way they all wanted and expected.

'What could possibly go wrong', they said, 'we’re family,' they said?

  • A quick marriage, a quick financial decision and a quick new home build followed.
  • Then life happened.

Everybody lost out, some more than others

The immediate impact

  • As Grandma Alma had given an amount of money above the Government's Gift Threshold, her pension was immediately reduced accordingly, for the next 5 years.

The next impact

Within 13 months the young wife had filed for divorce and sought a Family Law Court financial settlement claiming her share of the increase in value of the house and the gift of money from the Grandmother to the ‘newly married couple.’

  • Without a legally drafted and documented Family Loan Agreement, the significant deposit for a new home was deemed a family gift, never a loan to a grandson and was absorbed in the Family Court financial order.
  • Alma lost her money and her place to live and was then penalised by Centrelink for gifting more than $10,000 a year and now has a reduced pension as a penalty.

A reminder for us all - document your family loan agreements - so that if something goes wrong you can get the money back

Many of us would prefer not to face the complications of real-world money complications and changes in relationships.

Rather we prefer to cling to the message that makes the world simpler than it really is. We hold onto old, (and sometimes naïve) ideas as a way of keeping financial reality at arm's length and preventing us from seeing the importance of working with money as a set of needed adult life skills.

Pro Tip: If you're planning on sharing your hard-earned money with someone, use a legally drafted and documented Family Loan Agreement from an Australian law firm.  Avoid the DIY versions from marketing companies whose only claim to fame is having the word 'law’ in their name. You can only have the confidentiality of legal professional privilege and professional insurance from a law firm.

We’re always parenting or a role model for somebody

The job of sharing your hard-earned knowledge never stops. Whether you're a parent or a role model, we all innately understand (or at least suspect) that people in stressful situations don't always make the best money decisions.

And that's easy to see today, but what does that look like preparing for tomorrow?

Protecting your good intentions

Tomorrow is hard to see, (and often darn right impossible) in the current circumstances - so how do we create good habits that support our good behaviours and best intentions?

We can help you build a legally drafted and documented Family Loan Agreement through our secure customer portal.

Good hearts and bad ideas

There are some things most people seem to immediately understand and recognise as a bad idea:

  • Giving a large amount of money to someone experiencing an addiction to gambling or drugs – is not a good idea.
  • Giving a young child unrestrained access to a cash inheritance immediately – is not a good idea.
  • Helping a friend with money with no consideration if there is an underlying and ongoing problem – is not a good idea.
  • Receiving a large inheritance while they’re part way through a divorce proceeding in the Family Court and still dividing financial assets – is not a good idea.

The insight a generous person doesn't always want to hear

Readers of my Modern Small Business blog will know my thoughts about the difference between Charity and Philanthropy. Anyone who's endured a conversation with me about such issues no doubt will have heard about Charity creating the dependency, and its being very different from capacity building Philanthropy, which seeks to alleviate both the problem and its causes.

So when it comes to the more significant sized financial gifts (age, experience and maturity dependent) is there an additional level of wisdom to apply if you're not looking to create a destructive dependency with that gift? In looking at the carnage that large financial gifts given without wisdom can create, I think so.

In the same way, teaching your child to pursue money without character will cripple them, extending your generosity without wisdom can risk simply enabling a quick and disastrous behavior, rather than equipping them with capacity building money skills to navigate successfully in the financial world around them.

Why the Government regulates your gift giving pre-retirement

The government regulates how it responds to people who are accessing government pensions and who give significant amounts of money, income, or assets to others.

  • This is because when a person reduces their assets or income by making sizable financial gifts to others, they may in doing so automatically increase their eligibility for government services.
  • Simply put, the more you give away now, the more it reduces your future financial ability to be self-sufficient later and makes you more likely to rely upon government services.

In the same way, the government takes a protected approach to significant gifts, for those of us not using a government pension (or eligibility rebate or payments) (yet) perhaps we should take the same protective approach to our significant gift-giving, rather than risk creating a problem later that nobody saw coming.

The reality of human shortsightedness (and personal injury lawyers)

With age comes the possibility of a greater understanding of human nature and maturity. There's a reason why you don't give $1,000,000 to a teenager.

From over 20+ years in financial advice, my professional experience is:

While the gift receiver may very much ‘appreciate the gift’, they may not yet have had sufficient time and life experience to ‘fully understand’ the hard work that went into creating it, and the future consequences of giving it and receiving it.

  • We all smile the all-knowing-smile as our teenagers instinctively discover they actually know everything.
  • We all wince when we see vulnerable people being mistreated, under-appreciated and then preyed upon; at first in small, often unknowing steps that ultimately lead towards elder abuse.
  • We all agree we could have done a better job managing our past relationships if we only had more practical insights then, so why not our money relationships too?

Practical Insights and Key Messages you can’t ignore

Good parenting never stops, it only becomes more relevant the more resources and wisdom we amass.

People who suddenly find themselves in high stress situations don't automatically do their best work, so our looking over the horizon and preparing for the unexpected is part of living a more confident life and feeling more in control of our futures.

The 5 main risks that everyone faces in an unknown future are:

  1. Relationship breakdown is a real life risk and financial risk.
  2. Bankruptcy is happening more.
  3. Addictions - gambling, drugs and high risk speculative spending and investing, happen.
  4. Medical risks, mental health, and accidents affect relationships.
  5. Litigation and Personal Injury Lawyers who like to chase easy targets, middle-aged folk with assets.

Here are the Six Rules for Givers and Receivers

Think you don't need the ‘Rules’?

Give yourself the advantage of learning more about your options. Otherwise, you risk fracturing future long term relationships with all involved, by short term thinking.


Rules for Givers
(who are entitled to give)

  1. Always protect the recipient with a legal Family Loan Agreement (FLA).
  2. Start a family tradition about always gifting protected sizable gifts and always using a FLA before you can give.
  3. Never ever give a sizable gift without giving a FLA.
  4. Never provide a loan without asking for a FLA.
  5. Never provide a loan unless you already have in place your own Life insurance and Beneficiary Nomination, and Will already in place as part of the plan to repay the loan.
  6. Store all FLA with a solicitor and a scanned copy with your Financial Advisor.

Rules for Receivers
(who are entitled to receive)

  1. Always expect the giver to be protected with a legal Family Loan Agreement (FLA).
  2. Start a family tradition about receiving protected sizable gifts and requiring a FLA before you can receive a sizable gift.
  3. Never ever ask for a gift without asking for a FLA.
  4. Never ask for a loan without asking for a FLA.
  5. Never ever ask for a loan unless you already have in place your own life insurance and beneficiary nomination and a Will already in place and a plan on how to repay the loan.
  6. Store all FLA with a solicitor and a scanned copy with your Financial Advisor.
Why not consider a documented legal Family Loan Agreement (FLA) as the ‘special protective wrapping’ that a significant gift should always arrive in. (It actually makes it more significant and more considered too).

Key Learnings

  • Family Loan Agreements are about parenting, leadership, modeling good behaviour and protecting everyone involved in the sizable gift transaction.
  • Documenting Family Loan Agreements are like brushing your teeth - you should do it regularly even if you can't see the immediate benefit today.
  • Parenting never really ends and the job of sharing your hard-won wisdom should follow your hard-earned money and opportunity.
  • Not using a Family Loan Agreements risks fracturing future relationships of all involved, and it doesn't have to be that way if you don't want to risk that.
  • By taking a practical approach to lending money to family and friends, you can also take a protective approach.
  • Learn how to be more intentional about your money and to be more in control and not out of it.

The last word

Feeling some resistance to having a set of rules around giving and receiving sizable gifts?

At worst that could be a sense of entitlement, perhaps at best a sense of responsibility - only you can know the difference.

So in the meantime, get comfortable using a legally drafted and documented Family Loan Agreement.

  • When you use a Family Loan Agreement, if life doesn’t turn out the way we hoped, you and your loved ones are in the best position to start again, wiser and not poorer.
  • A Family Loan Agreement protects us from new or naïve beliefs that all contribute to keeping financial reality at arm's length and prevent us from seeing that learning to work better with money is a set of needed adult skills.

Sure, in a perfect world, we shouldn't need such protections; so until then we probably need to learn to use a Family Loan Agreement.

Buy your Family Loan Agreement document today through the Sapience Secure Customer Portal

Buy this Legal Document through the Sapience Customer Secure Portal

Family Loan Agreements - override the Family and Bankruptcy Courts

When you're ready to purchase a Family Loan Agreement, give us a Call, or jump the que and complete the introductory details form here and be registered into our Secure Customer portal where you can complete your instructions to our Lawyers and enter your payment details.

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author pic drew browneDrew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn Any information 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.

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