01 Feb Can I loan or gift money to my child to buy a property?
According to RealEstate, the age of first home buyers in Australia is edging closer to 40, and as property prices continue to increase, it is difficult to see this reducing. Any Sydneysider will tell you that property ownership is a far flung dream, often only achieved with the help of parents or grandparents who might pay the upfront costs such as stamp duty, deposit or legal fees.
But what are the practical implications of lending money, and how can you, as the lender, be protected?
Security of loan:
The first thing to consider when deciding to lend money, is whether you will secure the debt or not.
You can secure it by lodging a mortgage over the title (if your child or family member has bought without a mortgage lender), or by lodging a caveat against the title of the property (if your child or family member has bought with a mortgage lender). Securing the debt means that first of all, you will be entitled to recover your money in preference to other unsecured creditors, but also it can protect the money in any family law proceedings which may eventuate down the track (discussed further down).
In the unreported case of Winston v Winston , the full Magistrate Court found that an unsecured loan made by a mother to her son (and his partner), was in fact a gift. When considering their decision, the Court took into account the following factors:
1. the son is, and has been, financially reliant on his mother and extended family;
2. the mother has substantial personal wealth held in trust structures which she controls;
3. the mother wanted her son to live closer to her and the extended family; and
4. the mother was aware that her son did not have the financial ability to repay the money
Although the full Federal Court found that the Magistrate Court had erred, the fact remained that an unsecured debt can be disregarded when the validity or existence of a loan is in question, but even if a loan is held to exist, the amount can be adjusted to take into account the fact that but for the breakdown of relationship, the loan would not be repaid.
Repayment terms of the loan:
Deciding how the loan will be repaid is often avoided when discussing money matters with family. However, failing to accurately detail when the loan should or could be repaid, can have disastrous consequences. As a general rule of thumb, undocumented loans remain repayable for a period of six years from the date of the loan.
If the loan was made more than six years ago, you will need to check whether it has ever been “confirmed” by your child or family member. This could be a Company financial statement confirming its existence as a debt, or any part payment of capital or interest. If no such confirmation exists, the loan will be extinguished and you would have no right to repayment. If it has been “confirmed”, the six years will run from that date.
If the loan was made less than six years ago, you should document it as soon as possible and include a provision for time for repayment; this would prevent the loan from lapsing.
What happens if my child/family member separates from their partner?
If your child and their partner separate, the Family Court will not only consider what assets the couple have when making any financial orders, but also any debt. This is a double edged sword if money has been lent to them without any proper documentation or security. The partner may want to argue that the money was a gift and therefore take full advantage of the available equity in the home.
However, the Court has been found to disregard unsecured loans by family members if they are vague, uncertain, unreasonably incurred by one party, or where the Court believes the loan was a strategy to reduce the value of the asset before a separation.
I have more than one child, how do I keep the harmony?
Protecting the family dynamic is often a serious consideration for most parents, especially if they want to help, or may need to help, more than one child. Firstly, discussing with the children that the “bank of mum and/or dad” is not limitless would be a good place to start. You should also consider whether any unpaid loans count towards the child’s inheritance, and any child who does not received a lifetime loan or gift has their inheritance adjusted accordingly.
Should my child or family member protect the loan?
Absolutely yes. There are plenty of financial products on the market designed to protect the borrower such as life insurance and income protection. A qualified financial planner would be able to assist you with this.
If you have, or intend to give, money to a child or family member, give us a call to discuss your options. We have a some practical tips on lending money to family members in our Q&A entitled “Lending money to family members”.
Are there any implications to loaning my children money?
When loaning money to a child is that it will be considered by Centrelink to be an asset of yours for means test purposes which could have consequences down the track, particularly in relation to your entitlement to a pension and the cost to you of aged care facilities. With a gift you can only make a gift of $10,000 each year for pension purposes and any amount given away in excess of that is still considered, for 5 years after the gift was made, as being any asset of yours for the means test.
Do you have a family member who is in the process of buying a property? Have they asked you to to loan them money towards the purchase of the property? Are you concerned about the implications? Contact Solari and Stock Miranda on 8525 2700 or click here to request an appointment with one of our Commercial Law Team.