In recent times, an increasing number of parents are looking to give their child an “early inheritance” – that is, a gift of money during the child’s lifetime as opposed to the child receiving their inheritance pursuant to the parent’s will.
Parents often want to assist their child to purchase a new home or provide assistance to repay their existing mortgage.
Giving an early inheritance to a child, however, can be fraught with danger. For example, if a child becomes bankrupt, the gifted amount from the parent becomes available to the trustee in bankruptcy to pay off creditors.
Another example includes where the child has separated from their spouse. The funds provided by the parent effectively become part of the family law property pool which are available for division with the separated spouse.
In order to protect the “early inheritance” from the bankruptcy and a relationship breakdown, many parents are now loaning their child money pursuant to a formal loan agreement.
The loan agreement usually incorporates terms such as:
- The initial loan term which may be extended by agreement;
- The charging of simple interest on the final repayment of the amount;
- The repayment date for the loan (usually payable on 6 months demand, bankruptcy and relationship breakdown);
- The capturing of further advances to be included in any final loan amount; and
- The provision of security (for example, the parent taking a registered mortgage over the child’s residence).
A formal loan agreement provides the parent a sense of security and a certain degree of protection over the funds.
In the event of insolvency, the parent is able to call in the loan (along with interest charged pursuant to the agreement), thus protecting the loaned funds from being paid to the child’s various creditors. In a sense, the parent becomes a creditor of the child.
In the circumstance of a relationship breakdown, the parent again is able to call in the loan together with any interest which effectively quarantines these funds from forming part of the family law property pool which are liable to be split with the spouse.
The family court, however, has recently taken a narrow view of these family loans. A family court will still consider the loaned amount when making a determination as to how the property pool should be split between the child and their spouse.
However, on balance, the benefits of a family loan continue to outweigh those of an “early inheritance”.
Prepared by Leanne Matthewson
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.