Gifts or Loans To Children
December is a time for giving, and you may be considering providing your child or children with financial assistance through either a gift or a loan. Before making a gift or loan, you should consider the future implications, particularly in relation to your will if you pass away.
Gifts
Gifts differ from loans because there is no expectation of repayment. You may be financially secure enough to consider gifting money or assets to a child. However, there are several circumstances where these gifts can be lost. For example, assets may be included in the asset pool of a family law property settlement if your child separates from their spouse, or they could be lost if your child were to declare bankruptcy. There can also be major implications to both you and your child in terms of Centrelink pensions.
Loans
Loans are most often provided with an expected repayment date, or incremental repayment amount. There are many risks and considerations involved in providing a loan to your child. Firstly, if the loan is to be used to assist in purchasing a home, you should consider securing the loan against the property. There may be different implications if it’s a first mortgage, or there may be priority issues involved if there are other lenders.
You should discuss the terms of the loan in depth and the terms should be documented in a loan agreement. The terms may include interest rates, repayment dates or amounts, security and what occurs in the situation of a default. A loan agreement should be signed by all parties.
If a property is to be purchased by your child and their partner, both should sign the loan agreement and mortgage. A loan should not be advanced until the loan agreement and mortgage are in place.
Estate Planning
If you have given a loan or gift, you should consider the implications for your estate.
You should consider whether a gift or loan should be “evened up” or adjusted amongst your other children or beneficiaries under the will. Should the child that received a gift receive less compared to their siblings, or will they all receive an equal amount despite the earlier sum paid?
Your will should also address what happens to a loan once you die, for example, if it is to be forgiven or if it is expected to be repaid to your estate. Also consider whether you should factor in CPI increases.
To discuss this further or for more information please contact:
Deborah Anderson
Special Counsel
T 03 5225 5235
E danderson@ha.legal
Daniela Pavlovic
Principal
T 03 5225 5227 | M 0417 014 455
E dpavlovic@ha.legal
