A better way to lend money to family members

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.

While this may have consequences for a lender today, it also has consequences for a future tomorrow.

So how do you protect a gift to a family member?

Read in this article:

The Bank of Mum and Dad

The Bank of Mum and Dad is a part of Australian life and is where parents are lending, giving or underwriting record amounts for deposits to help their adult children buy their first home.

• With over $35 billion in gifts to adult children being recorded, this makes this 'invisible lending institution' the 9th largest mortgage lender in the Australian market.
• It seems helping adult children become financially independent is harder (and costlier than you might think. But this practice brings with it far-reaching effects hiding over the horizon, that many parents do not see today.

What could Alma have done differently to stop from losing the deposit for the house, in the resulting 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

Family Loan Agreements - a precaution, not a plan

Many modern Australian families are using a Parent Loan Agreement to protect both parents and their children 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 from 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 issue a Statement of Debt Forgiveness (we can help you with that) 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.

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

Pro Tip: Parents using a Family 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. Sapience clients can store copies of executed documents in our private Secure Client Portal behind 2-factor authentication security.

Drew 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.