- Helping the kids out with money – it can’t be that bad, can it?
- Put a bigger thinker into your financial situation
- Gifts, loans and inheritances – and the problems they can inadvertently cause
- Family law
- Blending Families
- When inheriting money is a bad thing
- High-risk jobs
- Elderly or additional needs individuals
- So what’s a family to do?
- What are the tax issues?
- Dividing inheritances now, not later
- Where to begin your conversation when making loans to children
- Case Study
- How could this have been different?
- Get it right first time
When it comes to money; lending it, gifting it and protecting it, having an eye for detail is key to making it work and keeping all the parties safe.
Many families want to help their children with a deposit for a home, perhaps money to start a business and even grandparents helping fund the education of the grandkids.
But how to do you give financial support to someone while making sure you don’t damage them, or yourself in the process? How do you make kind decisions today that can’t be used against them tomorrow?
The answer may actually be to make a formal loan agreement that all parties sign so you can protect them from risks that might not be visible yet?
Consider making a written legal loan agreement when loaning money to your children.
- Never ‘give’ your children money
- Always ‘lend’ them money ‘payable on demand’
- Never rely on a verbal agreement
- Get it back if something goes wrong
The most common risk for gifted money is when the Family Law Court gets involved.
If the child you gave money to goes through a Family Law Court separation, all matrimonial assets are up for assessment and division. If you’re not listed as a creditor, your gift is simply absorbed into the general matrimonial pool and divided as the court deems fit. More likely than not, you might not agree with the court's decision.
People in new relationships where there are children from past relationships or partners from past relationships have additional risks when it comes to protecting and dividing assets too.
One of the very real risks of taking a DIY approach to your estate planning is you simply don’t know the questions to ask and the issues to be aware of. You can’t predict the state of the relationships or financial situation in the future.
A typical example is when the recipient of an inheritance is a self-employed business owner or in a high-risk job such as an accountant, engineer or medical professional. These occupations are known for high rates of litigation so to suddenly receive an inheritance at the worst possible time, can mean it goes to the creditors first.
Elderly people or those with additional needs, those where English is a second language or those where there is a risk of relational dependency imbalance, are all at a heightened risk. This is why most people specify an age of majority in their wills to ensure any children do not inherit wealth before an age of responsibility. The government's regulator ASIC has information on elder abuse here.
One of my professional legal colleague puts it bluntly listing his 6 top reasons why you should always use a loan agreement over a formal gift.
“There is nothing wrong with helping our children financially but protect the money in case the children:
- Go bankrupt
- Suffer from drug addiction
- Suffer a mental condition
- Stop loving you
- You run out of money yourself, in your old age"
If you structure the agreement properly, there doesn't have to be any. The interest rate for the loan if ‘as advised by the Lender’ means while the interest rate is zero you have no income tax issues. There is less money for the Family Court to give to your ex-in-law.
Many families find they financially help their children at different times with different amounts according to need. A single adult child might receive greater assistance with a home deposit early in life while their sibling in a high paying job didn’t need the same level of assistance.
If you benefit one child over another then it can be adjusted automatically at the time of your death. Say you lend one child $500k and the other child $300k then that is adjusted at your death. This is made possible by written loan agreements.
Start your conversation here;
- Talk with all your children together about any family loans
- Never gift children money – only loan them money (this protects both you and them)
- Never rely on home-made loans or IOUs – use a legally prepared Loan Agreement
Dotty is an elderly lady who is renting in her retirement. Her grandson suggested that if she would help with the deposit for a new house, she could come and live with him and his new wife.
- Our advice to Dotty was she should make a written loan agreement between herself and her grandson, just in case something went wrong later that wasn’t apparent now.
Nine months later her grandson's wife moved out with someone else and contacted lawyers to begin divorce and financial separation proceedings. The house was eventually sold at a fire sale price with a loss of over $100,000 including the stamp duty and Dotty’s ‘gifted deposit’
- Because there was no written loan agreement relating to Dotty’s funds used to supply the deposit for the original purchase, the Family Law Court deemed it a gift to the couple and it was just part of the assets to be divided by the court.
Dotty is now back in the rental market living alone with no savings or emergency funds to call upon if needed.
If Dotty signed a legally prepared loan agreement, she could have been recognised as a debtor in the family law court proceedings and could have recalled the ‘gifted funds’ removing them for being distributed as part of the formal separation agreement.
When it comes to money and relationships, nobody can tell what’s over the horizon. By taking a practical approach to lending money to family and friends, you can also take a protective approach.
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.