We have seen an increasing interest of late in parents considering providing money to their kids. One of the most common reasons is to help with the purchase of their first home as young people are finding it increasingly difficult to break into the property market.
Now with COVID-19 and the subsequent economic downturn, we expect to see a significant increase in parents providing money to their children for a number of reasons; not just to assist with the purchase of real estate.
But is that money a gift? Or is that money a loan that needs to be repaid? How do parents ensure that the money provided to their children is protected if they expect it to be repaid?
This might seem simple but unfortunately, it can be far from it. In some instances, it is very complex trying to ascertain whether the money provided was a gift or loan, especially if the money is given from a parent to a child and there is a lack of evidence documenting the intention between the parties.
There is a legal presumption that money provided from a parent to a child is a gift unless the presumption is set aside and clearly demonstrated as being a loan. So, in the absence of loan documentation, it can be difficult to prove that the money provided was a loan.
We have had several matters where there is a dispute between family members as to whether money provided to a child was a gift or a loan.
Quite often the issue arises when the parent dies and family members do not know when the loan needs to be repaid. There have also been several disputes where the intentions of the parties in respect of a loan have not been properly documented.
If all parties agree the money is provided as a gift, it is still good practice to document it as a gift. This avoids any argument that it was a loan and the loan documentation has been misplaced.
To avoid the presumption that money provided from a parent to a child is a gift, it should be formally documented as a loan. Documenting the arrangement may also avoid arguments as to when the loan is to be repaid, what interest is payable and so on.
Care should be taken by both the lender and the borrower to properly document every repayment, as it all comes down to evidence if there is a later dispute as to whether the loan arrangement was honoured. It may be good practice on the anniversary of entry into the loan, for the lender and borrower to document what the current loan amount is and any repayments made to that date.
If you think that there could be an issue in the future with other family members not knowing if a loan has been repaid or not (for example, upon the death of the lender when their estate is being administered), then it may be a good idea, if appropriate, to tell the other family members about the loan so everyone is on the same page.
The type of document required will depend on what lengths you want to go to, in order to protect the money and ensure it is repaid.
Documenting a loan in a written agreement and having all lenders and borrowers sign the agreement, is an important step. The agreement needs to cover
Loans and gifts between family members can become quite complicated. We can assist you (either as the lender or borrower), to ensure your interests are protected and you understand any of the risks associated with the loan.
we are well placed to provide you with a holistic approach to your inquiry.
If you’d like to speak with someone about your loan or gift to a family member, feel free to start by contacting today’s blog author, Lauren Weatherley.
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This article is of a general nature and should not be relied upon as legal advice. If you require further information, advice or assistance for your specific circumstances, please contact E&A Lawyers.
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