In recent times, an increasing number of parents are looking to give their children an “early inheritance” – that is, provide money to them now to assist with the purchase of property or a business rather than waiting until they have died for their wealth to be distributed to the next generation.
It is the intention that although there is no need to pay interest to the parents, the money will remain within the family – if the property or business had to be sold because of financial difficulties or divorce, the parents’ money would come back to them before the surplus sale proceeds were divided with the other parties.
What’s the Problem?
The problem is that if there is no written agreement to support your intentions, you run the risk that the money advanced will be viewed as a gift to a family member and not a loan.
This means that if the child is in financial distress, the money loaned will be within reach of the trustee in bankruptcy to pay off creditors.
It also means that during a family court property settlement, the money will form part of the “matrimonial pool” which is available for division with the separated spouse.
What’s the Solution?
A well-documented loan can avoid these scenarios so that instead of the child owning all the equity in the property, there is, in fact, an enforceable debt which needs to be repaid to the parents first. The terms of the documentation need to reflect your personal circumstances but would usually incorporate things like:
- an initial loan term of 10 or 20 years which may be extended by agreement;
- no interest payable during the term of the loan;
- repayment can be required in the event of death, financial distress or relationship breakdown;
- the lender can elect to have interest paid on the final repayment of the loan;
- the ability for future advances to also be covered by the loan agreement; and
- the provision of security (for example, taking a 2nd registered mortgage over the property).
How can Murdoch Lawyers assist?
If you are considering providing significant financial assistance to a friend or family member, seek advice so that you are not leaving yourself exposed if there are third party claims made.
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.