The Bank of Mum and Dad
With property prices skyrocketing, recent studies have shown that more and more purchasers (first home buyers in particular) are relying on “the Bank of Mum and Dad” to help fund their foray into the market. So much so that “Mum and Dad” are now the country’s 9th biggest lender, with Digital Finance Analytics’ statistics indicating that more than 60% of property purchasers are receiving parental assistance to fund their deposit.
Whilst it’s great for families to lend a hand, and lovely to think that because it’s family all will “work out”, it is integral that the handing over of such funds is properly documented to ensure that it’s clear whether the advance is a gift or a loan and thus minimise the risk of problems down the track.
Problems that can arise include:
What is to happen upon the death of one or both of the parents? If the funds are treated as a loan, is the loan to be forgiven or is the child to repay it from their share of the estate? To ensure fairness, is there to be a “levelling up” of bequests to some children to take into account any funds loaned or gifted to other children?
What happens if the child who received the funds dies? Will the funds form part of the deceased child’s estate and potentially be paid to the child’s spouse? Was that the intention?
What happens if the child goes bankrupt? For instance, if the funds are a gift, then it’s likely that the proceeds will be clawed back by the trustee in bankruptcy for payment of creditors, while if the funds are a loan, then the parents may be able to classify themselves as a creditor and recover some or all of the funds.
What happens if the child separates from, or divorces, their spouse? If the funds are a gift rather than a loan, they may be added to the matrimonial pool and a portion lost to the ex-spouse in a property split.
In Australia, there is a legal principle called “the presumption of advancement or gift” where it is presumed that the advancement of money to a child is a gift rather than a loan. This presumption can be rebutted with evidence; however, it is key that such evidence exists.
In short, documentation is key. If it is a gift, make sure that you have something in writing to make that clear, and consider whether any updates need to happen with estate planning documents to ensure there aren’t fights amongst other children down the track.
If the advance of funds is a loan, whilst having anything in writing to say that is a start, nothing beats having a loan agreement in place that clearly sets out the terms (for example, how long the loan is for, what the repayment terms are, what interest is to be charged, etc). This loan would also, ideally, be secured through registration of a mortgage or caveat on the property that the funds were advanced for the purchase of.
Finally, all parties should review their estate planning documents to consider whether any changes need to be made to address the loaned funds.
Open and clear communication and documentation is key to being able to provide help to your kids to get them into the property market, while minimising the risk of there being a sting in the tail down the track.
If you need assistance in relation to estate planning, property matters, or the documentation of loans, please give Jenkins Legal Services a call on 02 4929 2000 or email firstname.lastname@example.org.
This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.