December 2018 | Jonathan Harris
If your child is in a state of financial need, it is understandable that you, as a parent, would want to help them. In recent times there has been an increase in the number of parents giving their adult children an “early inheritance” – that is, providing money to children before their wealth would otherwise have been distributed upon their death. However, these arrangements are not always as simple as they sound. It is important that parents follow the golden rule if the provision of money is intended to be a loan and not a gift: “always have a signed and dated written loan agreement.”
Loan vs. Gift
One of the first things parents should do before giving money to their children is to decide whether they’re making a gift or a loan of the money. A loan has to be repaid; a gift does not.
Without a written agreement, you run the risk that the money lent will be viewed as a gift and thus, will be within reach of your child’s trustee in bankruptcy to pay off creditors, should such a situation arise. It also means that during a family court settlement involving your child, the money will form part of the “matrimonial pool”; it is then available for division with the separated spouse.
If transferred money is intended to be a loan, not a gift, it is common for conversations about repayments to be forgotten later on. This is where a loan agreement can protect everyone. Whilst verbal contracts are just as enforceable as written contracts, they can cause headaches for individuals attempting to prove that a verbal contract existed – it is a case of one person’s word against another’s. This was especially true in the 2017 Queensland case of Berghan v Berghan in which the son of the plaintiffs, Barry Berghan, ‘borrowed’ a total of $286,471.09. It took many months and an eventual appeal for a judgment to be awarded in the parents favour and for it to be established that the money was never a gift, but a loan that was always intended by the parents to be repaid.
Don’t be shy
If a borrower (including your child) is genuinely seeking a loan, they shouldn’t have any reservations about signing a loan agreement. Whilst it may be momentarily uncomfortable, a written loan agreement can avoid serious family rifts down the track. A loan agreement frequently contains the following:
- The amount of the loan (the principal sum)
- Interest – the rate + whether or not it is payable
- The term of the loan
- When the loan is to be repaid
- Method of repayments during the term
How can HF Lawyers help you?
Harris Freidman Lawyers can assist you in the preparation of a comprehensive loan agreement to ensure all parties understand their obligations. If you are considering providing financial assistance to a child, seek advice from our Estate Planning Team.