Many parents regard it worthwhile lending or giving money to their children to help them buy a home. But, there’s a very big difference between giving and lending. When you don’t have proper documentation that establishes that the money handed over is a loan, it’s not a loan.
If you are lending or gifting money to your children, you need to consider:
1. What will happen if you need the money back in an emergency?
Where there is no loan agreement there is no obligation to repay the money. You may be left out of pocket.
2. What will happened if you or your spouse die?
Again, where there is no loan agreement there is no obligation to repay the money. If you have other children, they may be disgruntled that one of their siblings has received a greater benefit.
3. What will happen if your son or daughter dies leaving a spouse?
If your son or daughter does not have a loan agreement or a clause in their will stating the money needs to be repaid, then the money may be lost. Chamberlains encountered a situation where two parents loaned their son $200,000.00 to buy a home with his new wife. The son died just five weeks after getting married and did not have a will or a loan agreement. The money automatically passed on to his spouse, despite the fact the parents and son had intended it as a loan.
4. What will happen if your child and their spouse split up?
You may say to you son or daughter “give it back when you have it”. But if they separate the spouse may state that they thought the loan was in fact a “gift”. Without a repayment date, or a schedule to repay the loan, the Courts will treat the money as a gift.
If a parent is lending rather than giving money it’s vital to have that reflected in a formal legal document to prevent confusion and distress down the track. It is much cheaper and less traumatic to sort it out at the outset with a legal document, rather than waiting and ending up in court.
Chamberlains can assist in drafting up loan documentation to cater for your unique circumstances.
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