Parents lending money to kids? Loan or gift? The difference matters
Many parents help their children with money to buy a home or get ahead in life. But what happens if their marriage or relationship breaks down later on?
Recently, I was asked about a case where money from the “Bank of Mum & Dad” was not protected and the court had little choice but to treat it as something other than a genuine loan.
In this short video, I explain:
• Why informal family loans can fail in court
• The simple steps that make it clear the money is a loan, not a gift
• How to protect the assets you’ve worked hard to build
It’s quick, practical, and something every parent considering helping their children financially should know.
A few simple steps today could protect a significant amount of your wealth tomorrow.
If you have questions about setting up a Bank of Mum & Dad loan properly, feel free to get in touch.
Working with you
Ross Millen & The Millens Team
VIDEO TRANSCRIPT
Ross Millen:
Hi. I had a client contact me the other day and said that they'd heard about this case as a bank of mom and dad, one of those loan deeds. They said they'd heard that the loan had been struck down because there hadn't been a loan agreement or it had only just come into existence and that the spouse of the person, their child who was challenging it, hadn't had any independent legal advice. There'd never been any interest, never been any repayments. And I said, "Well, I'm not sure what outcome..." It wasn't their case, but I'm not sure what outcome the court could otherwise have come to. I mean, this shows all the reasons why if you want to protect your assets against a possible future separation or marriage breakdown, why you need to take some fairly straightforward steps when you make an advance to your children for them to help them buy a house or get on in life.
So, first thing is make sure you actually prepare a written loan deed. We've got a fairly simple one. It's easy to read, doesn't take long. And get everyone to sign it. And if the spouse is also signing because they're borrowing the money or they're on the title, make sure they do actually really get independent legal advice because that'll tell them what their obligations are and the rights. And so, it's much, much easier later on down the track to say this was a genuine loan.
Some people will charge interest at a low rate, and maybe it's not payable, but they'll produce every six months or 12 months a loan statement saying, "This is what you were loaned. This is the interest that's been earned and now this is your new balance that we're now calculating the interest on." And maybe sometime down the track in your will or otherwise, you forget about all that, but at least you've got the documents to show and to prove if you need to that it was genuinely a loan, and whether you take some security over the property and register a caveat or even a mortgage in some cases.
So remember, if you don't want a wealth extinction event for at least maybe 50% or more of the money that you're giving to your children, remember to come and see us. We can help you with the Bank of Mum and Dad. We can prepare the loan deed. We can give you advice to protect your valuable assets. So, I'm Ross Millen from Millens. Give us a call. We're here to help.