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Loans to Children – Don’t be Vague

When making loans to children, you will probably be nagged by conflicting emotions and truisms.  Should I document the loan for clarity? But they look so happy together and can use it more now than after I die. I worked hard to earn that money; what if there’s another GFC and I need to be repaid?   It’s all peace now, but should I prepare for war? Will a stitch in time save 9?

I cannot over emphasise the need for clarity and documentation when making loans to children.  If it is a loan, it needs to be documented and shown that there is an intention to create legal relations.  The loan document should record the amount(s) being advanced; the interest rate, if any; the term of the loan; and when it must be repaid. If it is a large enough amount and you want security, then you should insist on a registered mortgage.  Speak about the “elephant in the room” with your child’s partner/spouse, as awkward and difficult as that might be.  It is a loan to your child and it will need to be repaid.

In the event of a relationship breakup there is no guarantee the family courts will treat your loan as a debt of both parties.  However, if there is proper documentation and you abide by it, you will have a far better chance to recover your loan and continue to be able to support your child in the future.  Liabilities that are vague, uncertain, and/or unlikely to be enforced are likely to be treated differently.  The lack of documentation and stated intentions may be one circumstance that persuades a court that it is unjust and inequitable to treat your loan as a true liability that needs to be repaid.

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