In this podcast, Director Mark Sullivan, explains what should be taken into account for loans and gifts to children if the family relationship should breakdown.
Annie: “Welcome, today I’m talking with Mark Sullivan, from Mullane and Lindsay Solicitors, Newcastle and Tea Gardens. Hi Mark, thank you for taking my call for this phone interview”
Mark: “I’m glad to be speaking with you.”
Annie: “Our topic of discussion for this interview is, what do I need to know about loans and gifts to my children, when family relationships break down. Mark, can you tell us, why is this a relevant topic for our audience in 2022?”
Mark: “Well, parents are enably generous and there are many pitfalls in being generous. Particularly if parents don’t have those awkward discussions about money and property and there’s chance it’s not had in a timely manner, and they’re not well documented. There’s been rising house prices and many parents have wanted to assist their kids to get them in the market. Now we’ve got those interest rates and the cost of living increases and parents are likely to again be called upon to help provide further financial support for their kids. Frequently recorded was the bank of mum and dad is lending being $35-$92 billion dollars to Australian families at the moment and that’s probably between the 5th and the 9th biggest paying mortgage lender in Australia and 2021. So, if person relationships are becoming increasingly complex with more blended families and increasing relationships break down and more monies being gifted and loaned, I think that there’s a recipe for disaster out there. I think most of us have some personal experience with divisions in families, either between spouses or siblings and our children and their partners and spouses. Whilst it’s an ever-growing issue, I think it’s more relevant now.”
Annie: “Wow, so you mentioned some pitfalls for generous parents, what might they be?”
Mark: “Well firstly, the likelihood of dispute, the failure to have those awkward discussions about loans and gifts to children and failure to retain documentary records, often lead to expensive litigation and the destruction of personal relationships, which in my experience frequently impacts on people’s health. I think most of us can imagine the trauma our bank balance and the destruction of your personal relationships with your kids and grandkids, become a party to the litigation between them and its pretty disappointing if you’ve worked your life and been in a fortunate position to advance money or loan to your kids, only to see their relationship break down and your child not receive the benefit of that gift.”
Annie: “Is there a difference between how a gift or a loan of money or property to a child is treated in a property settlement?”
Mark: “Definitely, when money or property is gifted to a child, it generally means the parent has no expectation that it will be repaid or returned to them. They give it absolutely and lose the right to seek repayment from that child. If that child’s relationship breakdowns, the money or property that was gifted would generally form part of the pool of property to be divided between the child and their spouse. Now whilst it would be relevant consideration that the property was gifted by the parent and was a contribution by that child’s family, there’s no guarantee that child will receive the full benefit of that gift. In my experience, that upsets parents gravely and often the child. When money is loaned to a child, there is generally an expectation that the child will make repayments pursuant to an oral or written agreement. Then the child’s relationship breaks down, that money or property that was loaned, will generally not form part of the pool of property to be divided between the child and the spouse. There’s a strong argument that the debt of a parent should be repaid before the remaining assets have been adjusted between the child and the spouse, so, in those circumstances, the parents have the better opportunity to recover their money and they also would be able to readvance it to the child at a later time or spend it on their own needs.”
Annie: “Then, can you tell me, what are some of the complications you’ve seen when parents make gifts or loans and don’t take the proper precautionary steps?”
Mark: “As I indicated, the recipe for dispute, people’s recollections change and in the absence of clear and unambiguous documentation, there can be disputes about what was said to whom, where and when. And life’s pretty complicated, money might be advanced as a loan, but people become unemployed or the birth of children and it’s not possible to keep all the loan repayments up, there may be confusion as to whether the loan is continuing or has been forgiven. Of course, in family law proceedings not everybody is honest and ethical, you get people who may lie and say the money in advance was never meant to be a loan, it was a gift to a child and a partner and not just the child alone. In some circumstances, repayment of loans can’t be forced after a period of 6 years, particularly if parent’s failure to take steps to protect their position. Parents may simply not want to become involved in the dictation of the parent of their grandchild, it’s a sticky and awkward situation.”
Annie: “So, are there any solutions to these problems?”
Mark: “Yes, loans need to be formally documented and must include an intention by the parties to be binding, whether there’s to be any interest payable and to what rate if any, determine the loan whether the full amount is payable within so many days or if there’s demands being made and then the security that’s being offered in respect of the loan, such as a mortgage over a home or a charge over a car, or right to put a caveat over the title of property. Advance should be from both parents’ just in case one should die and also to ensure that the parents are on the same page. The lack of security can sometimes be fatal to the question of whether or not the loan is enforceable, and parents’ and the child need to be transparent in their intentions. Ideally, they should also involve the child’s spouse and even keep other siblings informed so its not to break up families. These would measure people’s expectations in helps to reduce the risk of potential litigation and any sibling fallout. Also, going to assist the argument that those parties should bear the responsibility for the liability in circumstances where the child and their spouse are both aware of the liability. If it’s intended that the property is transferred or advance by way of gift, parents should keep a chronology of when the gifts were made and their intention to benefit their child and that should be carbureted by supporting documents preserved in a safe in a safe place in case its ever needed. And often times if a gift is intended to be conditional then their needs to be statement in writing setting out their conditions. Alternatively, people keep contemporative notes about conversations between parties, including by what was said by whom and when it was said.”
Annie: “Makes sense to me. Do you need to get advice from a lawyer if you’re thinking of making a generous loan or gift to your child?”
Mark: “I think that’s a good idea, depending on the size of the loan or gift, I think it’s very important to obtain some independent legal advice. May simply be an overview or circumstances may arise that may require making documentation. If you don’t get that advice and choose to make a gift to a child who’s in a relationship that later breaks down, then that gift will form part of the assets of distribution of the child’s spouse and the child may be denied the benefit of that gift. So, giving documented loans, is fair better than giving gifts and that might be the advice. The documentation of the loans might not need a lawyer but obtaining the proper security such as a mortgage or a charge or caveat on the property will inevitably need some legal advice or legal assistance. You certainly don’t need a lawyer to make a payment record and preserve them in a safe place, should relationships break down and should you wish to assist your child or recover money advance, you don’t need a lawyer to have those awkward conversations and make certain that everything is transparent. I think the summary should be, the mantra should be, DOCUMENT, DOCUMENT, DOCUMENT!”
Annie: “Thank you for your time and advice on this subject, Mark. Most helpful and thanks also to Mullane and Lindsay, Newcastle and Tea Gardens”
