Insights

With rising property prices and the cost of living, many Australian parents are lending money to help their children buy homes, start businesses, or manage significant expenses. Lending money to children often comes from a place of love and trust. However, what happens when misunderstandings arise, or a divorce is involved? These scenarios can strain relationships and even lead to legal disputes.

Loan or Gift?

Financial assistance to children can be given as a loan or as a gift. The key difference between the two is that for a loan, the lender expects the money to be repaid later. Loans and gifts are treated differently and can have different impacts on tax liabilities, estate planning or in the case of a divorce, the classification of marital assets. Irrespective of whether financial assistance is given as a loan or gift, it is worthwhile documenting them to avoid confusion.

Loan Agreement

If financial assistance is given as a loan, we recommend that the parties document this via a written loan agreement. A loan agreement helps to define the transaction as a loan, and not a gift. A loan agreement outlines key details, such as:

• Loan amount and repayment terms
• Interest rates (if applicable)
• Consequences of non-payment
• Whether the loan is secured against any assets

A loan agreement helps to protect the loan in situations like a child getting divorced, where the money could otherwise be treated as part of the marital assets. Whilst a written agreement is not solely determinative of the outcome in a family court divorce case, it is an important tool to help protect the funds.

Other Things to Consider

Beyond having a written loan agreement, below are some other considerations:

• If the loan is used to purchase property, parents could consider registering security over the property, such as through a mortgage or caveat.
• Will the loan affect broader estate planning, such as competing interests amongst heirs?
• Will the loan generate taxable income, thereby affecting tax liabilities?  

How we can help with lending between family members

West Perth Legal provides legal assistance in managing the legal risks associated with loans between parents and children. We help establish clear terms for the loan, formalise the agreement, and implement measures to secure the loan.

We also provide independent legal advice for parents guaranteeing a loan for their child. Contact us if you require a Solicitor’s Certificate.

Phone us on (08) 9321 9395 or email info@westperthlegal.com.au for an obligation free quote!

Disclaimer: the content of this article is provided as general information only and does not constitute legal or other advice on any specific matter and should not be relied upon as such. If you are seeking or require legal advice, please contact our lawyers.