Lending Money to Your Kids? Here's How to Protect Yourself.
If you have an adult (or almost-adult) child preparing for a big life investment – like their first home – you might find they’ll put their feelers out for a little financial help. And due to the rising cost of living, inflation and the almost-impossible-to-break-into property market, it’s becoming more and more common for kids to seek out financial help from their parents.
When you say ‘yes’ to financially helping your child out, it’s important to take measures to protect yourself. And thankfully, there are a myriad of ways you can safely and sustainably support your kids while also reducing the chances of landing in a family feud.
Here’s what we’d recommend considering.
Decide if the money is a gift or a loan
Differentiating between a gift and a loan might not seem too important, but it is. In practice, loans and gifts might feel similar, but they’re treated differently when it comes to taxation and the law. That’s why you need to set clear expectations of the arrangement from the start.
Something else to consider is how a gift or loan might be affected by your death. If you were to loan you child a sum of money, would you be happy to write the loan off? Would you like the loan to be taken into consideration as part of that child's inhertance.
Our top tips? Be explicit as to whether it is a gift with no strings attached, or a loan that you expect to be paid back. If the sum is a loan, be clear about the payment terms too. Then, make sure you’ve written everything down. It's generally a good idea to store these documents somewhere safe and accessible (like alongside your legal Will) so there’s a record of what’s been agreed upon.
Secure your loan with a clear loan agreement (aka. mortgage secured on title)
If you decide that the money you’re giving your child is a loan (and not a gift), you will need to secure that loan against your child’s purchase (for example, a house). This means that if your child goes bankrupt before paying off their loan, you’ll be first in line to receive your money ahead of any other third-party creditors who are owed money.
In the case of a home purchase, this means you’ll have legal access to your money when your child’s house is sold, just like a bank gets paid first when a house gets sold. In this case, however, the bank will likely be paid first (if a mortgage has been taken out), making you the second in line to receive your payment.
Seek independent legal advice on the family loan
It might be worth putting measures in place to manage family loans, especially if this is something you’re considering doling out to all of your kids (or other family members). Make sure all those benefiting from your loan(s) understand how their loan from you will work and what purchases might be eligible for a loan (for example, you might be willing to provide a loan for a house purchase or business venture, but not for a motorbike purchase or overseas holiday).
Wrap up
It might sound unnecessary but being clear about your intentions, and putting things in writing is crucial when it comes to gifts and loans to family and friends. Indeed, if things go as planned then contracts and documentation might indeed not have been required. But if things go off the rails, then having an agreement to return too can save a lot of confusion, heartache and ill-will. So, just like a standard bank loan where you have legal documents setting out your rights and responsibilities, take the legal steps that will ensure your money is protected and your agreement is clear and enforceable.
You can keeping track of any familial loans in your Willed Vault. Your vault is complimentary when you make your Will online with Willed. Start today at willed.com.au.
Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.
