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The Bank of Mum and Dad

Rising house prices and interest rates are seeing more parents assisting their children with purchasing their first home. This article outlines the fundamental considerations of advancing funds to your children for this important purchase.

Begin by deciding whether the funds will be a gift or a loan. While a formal document may not be necessary for a gift, it is still beneficial to have a document acknowledging the funds as a gift rather than a loan, and acknowledgement of your child’s receipt of the gift.

With a loan, consider issues such as the presumption of advancement between parent and child, and the statute of limitations that can see loans become unenforceable unless the loan is acknowledged every six years. A Deed of Loan is a useful document that can outline the expectations of the loan and help reduce your risk as lender. Commins Hendriks can provide you with legal advice and assist with drafting a Deed of Loan that addresses these issues and more.

Parents are often concerned monies advanced to their child will be later subject to a family law property settlement in the event the child separates from their partner. The child may wish to consider entering into a Binding Financial Agreement with their partner prior to or during their relationship to quarantine the advance of monies from a property settlement.

It is also important that parents have regard to how the advance of monies will impact their own estate planning – and further – how the loan might be called on to be repaid in the event the parent experiences financial hardship. There are mechanisms such as a loan security over property, a quistclose trust clause in a Deed of Loan, or a Co-Ownership Agreement.

You may opt to charge interest on the loan. If so, your Deed of Loan should be clear about the terms of interest and repayment. Noting that interest will be assessable income.

If you’ve already loaned money to your child, you can still draft a Deed of Loan and a Co-Ownership Agreement after the fact, with your child’s agreement.

When incorporating gifts or loans into your estate planning, consider equalising clauses in your will and explore options like testamentary trusts or forgiving the loan under the terms of your will. Our Estate Planning team are available to further advise you.

Acting as “the bank of mum and dad” requires thought and consideration. We recommend speaking to one of our solicitors to provide specific advice and help draft up these important legal documents. We also recommend discussing the loan or gift with your financial advisor.

The advice provided above is general in nature and should not be taken as formal legal advice.

Article by Rebecca Hartshorne, Solicitor with Commins Hendriks.