September 2012 | Jonathan Harris
Before you transfer any money to your child consider seeking legal advice to protect yourself and your children. You should enter into a loan agreement if you lend money to your child to record the terms of the loan. This does not have to be a complicated document. Some issues you should consider when making a loan are:
1. Family Law
A gift of money from a parent to a child who is married or in a de facto relationship will very likely be considered an asset of the relationship and eventually divided between that child and their spouse. For this reason your child should sign a loan agreement setting out the terms of the loan. Generally, the more commercial in nature the terms of the loan, the more likely that a Court will view the loan as neither an asset of the relationship nor a financial resource of the child.
Often parents do not want to encumber their children’s property. However, if you do not take security over your child’s assets and your child goes bankrupt other creditors of your child may be paid before you.
3. Estate Planning
How will you deal with the loan in your Will? Will you forgive the loan and compensate your other children accordingly? Will your estate have a right to call back on the loan? Will you assign the benefit of the loan to your spouse?
4. Deceased Estates
If your child predeceases you, will their surviving spouse be able to repay the loan? Do you have security to recover the amount of the loan from the surviving spouse? If there is a dispute in the future, it may be you (as the parent) who has to prove that the loan was not a gift.
A loan agreement may help resolve possible disputes.
Written by Jonathan Harris
(02) 9231 2466
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