I want to lend or gift money to my child, what do I need to be aware of?

Lending within family members, especially parents lending to their children, is on the rise due to escalating housing costs and economic constraints in Australia. Although there might be a tendency to rely on informal arrangements, our experienced lawyers at Solari and Stock know that a well-constructed, written loan agreement endures over time and overcomes some potential issues which might otherwise arise at law.

While families may feel compelled to assist their children with property purchases or business ventures without formalities or professional advice, there are considerable risks for both the lending parents and borrowing children if legal  advice isn’t sought and agreements aren’t properly documented beforehand.

Typically, parent-to-child loans involve parents financing the purchase of a home for their children. At Solari and Stock, we  have vast experience in drafting intergenerational loan agreements and putting in place security measures so that both parties can benefit from enhanced protections against potential future changes in circumstances.

Gift or Loan?

Determining whether the funds provided by the parents constitute a gift or a loan is essential prior to finalizing the transaction, as each option carries significant consequences. A gift entails an unconditional transfer of funds, while a loan involves a conditional transfer with an obligation for repayment, typically with added terms such as interest payments.

Parents may indeed intend to gift the funds to their children, but it’s important to recognize that such gifts can have some unintended consequences. The most significant for most parents is usually that if their child marries, their gift to their child will become part of the marriage asset pool to be divided in any future divorce proceedings.

Documenting the loan arrangement offers various benefits, primarily enhancing enforceability. In Australia, loans between a parent and child that are not formalised in a written loan agreement will be presumed to be a gift. The law presumes that when family members provide financial assistance, they do so with the intention to benefit the recipient rather than to create a legally binding obligation for repayment. As such, proper documentation is essential to mitigate potential legal challenges and ensure clarity regarding the nature of the transaction.

Consequences of not having a loan agreement

Although there are many consequences that can result from the absence of a formal, well-drafted loan agreement, perhaps one of the most significant is that which is captured in the case of Maddock & Anor (No.2) [2011] FMCAfam 1340. In this case a father loaned his child and the child’s spouse an amount of $240,000.00 so that they could buy a new home. There was no loan agreement written or signed.  When the child and their spouse decided to divorce, the court would not recognise the advanced money as a loan. The court determined it was given to the child as a gift as there was no formality, no loan term or terms or repayment and there had never been any demand for repayment of the loan until the relationship breakdown.

If you are thinking of lending or gifting money to a family member, considering seeking professional legal advice from Solari and Stock before doing so.

To make an appointment with one of our Commercial Team please contact Solari and Stock on 8525 2700, or click here to request an appointment with one of our experienced Solicitors.

Article written by Suna Ozcan
Photo by Andrew Mead on Unsplash