We have had a number of enquiries about Loans v Gifts to Children

Loans v Gifts to Children

We have had a number of enquiries about Loans v Gifts to Children

In many families, there is a movement of money from parents to children. How do you want to record the transaction? Should it be a gift or should it be a loan?

Giving your children money. Loans vs Gifts

What is the best way to provide children with financial assistance. Many parents think they are being kind when they gift money to children. However, such is not always the best course of action. If the child divorces or goes bankrupt the money is lost.

But I love my children

There is nothing wrong with helping your children financially. However, it is important to protect the monies in case the following occurs:

  1. they divorce
  2. go bankrupt
  3. suffer from drugs
  4. suffer a mental condition
  5. stop loving you and there are family disputes
  6. you run out of money yourself, in your old age or retirement

Therefore, to protect your loan a law firm can prepare loan agreements that comply with the Family Court. Homemade loan agreements may not work as they carry less weight with the Family Court and Bankruptcy Court. Why take the risk, discuss with a lawyer your situation?

Documenting loans to children

Never ‘give’ your children money. Always ‘lend’ them money ‘payable on demand’. Get it back if something goes wrong.

A loan is not always for property and the grandchildren’s school fees. You can also fund the children’s Superannuation fund, discuss this with a lawyer.

At different times, it is common to benefit one child over another with money. If you benefit one child over another it can be  adjusted automatically at the time of your death. Say you lend one child $500,000 and the other child $300,000 that can be adjusted after your death. This will allow everything to remain fair.

When making loans to children:

  1. talk with all your children together about the loans
  2. never gift children money – only loan them money (this protects both you and them)
  3. don’t rely on home-made loans or IOUs – we can assist you in having a legally prepared Loan Agreement through a law firm.

Loan Accountants & Unpaid Present Entitlements

In a Family Trust the parents will often distribute income to the children to take advantage of lower rates of tax. The children never see the money. Instead, they loan it back to the Family Trust. This is called an Unpaid Present Entitement (UPE). Sadly, at any time the child can ask for the money. Deeds of Debt Forgiveness can be prepared.

It may be wise to speak to a lawyer about the following:

  1. Loans to children – get 100% of the money back if the child divorces, overrides the Family Court.
  2. Loans to high risk spouse – ‘safe harbour’ mum lends money to an ‘at risk’ husband who is a professional or business owner.
  3. Deed of Debt forgiveness – children forgive debt that the Family Trust owes them

(Legal Consolidated Barristers & Solicitors, 2017)

 

Leave a Reply

Your email address will not be published. Required fields are marked *