Should I Gift or Loan money to my children?
Understandably, the question of whether to gift or loan money to children often arises, especially when they are in the process of purchasing their first homes and are looking for financial support from their parents. It becomes crucial to consider various scenarios to better comprehend the implications of each decision.
In the first scenario, a gift of $900k is given to Mary by her parents to purchase a home. After getting married to James and then deciding to separate after a decade, under the Family Law Act 1975, their home is considered an asset of their marriage. Consequently, the Federal Circuit and Family Court of Australia ruling states that James is entitled to half of the property value ($450k), completely disregarding the fact that the funds originated as a gift from Mary’s parents. This outcome, sadly, is not uncommon and teaches a vital lesson: lending large amounts of money to children is often wiser than gifting them. Such a measure ensures the protection of your assets from potential loss.
Now consider a second scenario where Mary’s parents decide to lend her $900k under a Parent Loan Agreement. With this loan, Mary is able to buy a home and later gets married to James. After ten years, their marriage breaks down, and they decide to separate. The home, valued at $900k, is their only marital asset.
Related: Financial gift from parents
Loan Agreement Under Family Court Of Australia
Upon presentation of the Loan Agreement to the Federal Circuit and Family Court of Australia, James is awarded nothing because the assets of the marriage are effectively null. This outcome occurs because the value of the house ($900k) equals the loan ($900k). Thus, this scenario underscores the importance of devising a legally sound Loan Agreement to safeguard your loan.
The emotional elements involved in such decisions cannot be ignored. Providing financial support to our children is not inherently flawed. Indeed, there are many instances where we choose to help, such as when they are buying their first car, paying education fees, handling medical expenses, or purchasing a property.
The trend of helping children with home payments is on the rise. Nonetheless, gifting money outright carries inherent risks. Therefore, it is crucial to protect this money against unforeseen circumstances, which may include divorce, bankruptcy, substance dependency, mental health issues, or a situation where you deplete your funds during retirement.
Lending vs Giving Money To Children
It is recommended to ‘lend’ rather than ‘give’ money to your children. This loan should be ‘payable on demand’, providing the option to recover the funds if situations go south. Consider the transaction similar to a bank providing a loan to your children.
Creating a loan agreement for your children not only protects your interests but also shields your child. This strategy offers the possibility to forgive the loan at some point in the future, either during your lifetime or in your Will. In terms of loans to children, verbal agreements should not be relied upon exclusively. The necessity for written, legally-binding documentation is vital. Such measures ensure security and prevent potential disputes or losses.
In conclusion, while gifting money to children might seem like the most loving and straightforward route, it often pays to take the time and effort to structure these transactions as loans, protected by legally robust agreements.