Is it a Gift or a Loan?
With the Australian preoccupation with getting into the housing market and the difficulties faced especially by young, first home buyers, very often cashed-up or asset-rich parents will assist their children by ‘lending’ them money. However, such acts of generosity can lead to serious fallout if there is not a clear definition of the actual ‘loan’. Is it a gift? An early inheritance? A loan? Do the parents expect repayments? If so, on what terms and in what timely manner?
The Bank of Mum and Dad is flourishing, so I was very interested to read a news story in the New Zealand Herald with the attention-grabbing headline “We Are Not a Bank – Parents Sue Daughter”. http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=11852648
Parents Sue Daughter Over Property Loan
While this particular story happened across the ditch, the events and circumstances are frequently played out here in Australia.
In the NZ case, the parents sued their daughter to recover $345,000 that they lent her to purchase a house. According to the news story, the daughter had refused to repay the loan even though she had money to spend on other ‘luxuries’ while her elderly parents continued working hard just to make ends meet.
This raises the very important issue that all types of family financial transactions need to be clearly documented, addressed in writing and clear understanding established on both sides.
Our Team has extensive experience in all aspects of Family Law and laws relating to families so we can assist you in this matter.
Setting the Terms
To avoid future problems, we strongly recommend to clients that the terms of the loan be reduced to writing and signed by the parties in a formal agreement.
This may seem quite extraordinary for some happy families and may even be received with resistance by some. However, when you consider some of the possible scenarios, the practicality and sensibility of such an action is completely justified.
A very typical scenario we come across, plays out as follows:-
- Mum and dad lend their child money (it can be anywhere from $20,000.00 to $200,000.00) in order to help them buy a house.
- There is nothing in writing establishing the terms of the loan e.g. the term of the loan, is interest to be charged, how it is to be repaid (fortnightly, monthly or annually), whether it has to be repaid on demand, is there any security given for the loan, etc.
- The child goes rogue and refuses to pay the money back.
- The child, through bad decisions, sickness, job loss or whatever loses the house and the parents’ money with it.
- The child’s marriage breaks up and the spouse claims that the money given by the parents was in fact a gift, not a loan and therefore not liable to be repaid.
- The parents own circumstances change whether it be through ill health, job loss or retirement such that they need the money back from their child for their own circumstances and the child refuses to repay it.
Making a bad situation even worse, parents can also act as guarantor over loans made by the children for the remainder of the home purchase, putting themselves in a liable situation if the above scenario occurs.
So when it comes to lending money to a child or another family member, don’t let your heart rule your head. Put love and affection to one side and consider sensibility and practicality. If you are lending money to your child protect yourself from unintended consequences by drawing up a specific loan agreement.
You may also like to review our resources on Conveyancing, which cover the steps of buying property including financial processes.
If you are considering lending money to a child or other family member, talk to us about preparing documentation to protect both yourself and the recipient from misunderstanding and misadventure. For more information, please contact John McLaughlin, McLaughlin & Associates Lawyers, firstname.lastname@example.org 07 3808 7777