Helping out a struggling family member always begins with goodwill and the best of intentions.
But gifts and loans between family members all too often result in family disputes and litigation which could easily be avoided with some simple precautions.
The incredible rise in house values, the economic consequences of COVID-19 and the rising cost of living, mean lots of Australian families will be relying on family to help out more than ever and that support is likely to take the form of financial assistance.
Lending to family members is typically done informally, but this can be problematic. The danger is that either you or estate won’t be repaid, or an important relationship will be spoilt.
Here are some valuable tips to minimise the downside of family loans and to help you to achieve what you want to do, i.e. provide temporary assistance to a loved family member:
Gift or Loan? What sort of help are you offering?
Is the financial assistance you are providing a gift or a loan? A loan must be repaid. A gift does not. Have you made it clear what your intentions are? “Let me help you out,” might mean ‘loan’ to you, and ‘gift’ to them.
Let’s say that you decide to lend some money to your son. Your relationship is strong and you trust each other. It is clearly understood between you that this is to be a temporary loan.
But because you are ‘family’ you don’t bother to make a written agreement.
Tragically, a few years later, your son dies in an accident. It occurs at a time when you need to transition into retirement accommodation, and you need the money back to be able to afford the accommodation buy-in. Your son’s widow is devastated as she thought you had made a gift.
Your other child (daughter) knew nothing about it, and is furious that (A) she did not receive the benefit of a similar financial assistance and (B) that your son’s widow is claiming for herself something that would form part of your estate to eventually form part of your daughter’s inheritance.
In other words, other people are likely to be affected by this loan or gift, and if you rely solely on informal and verbal communications about it, you run a huge risk of a misunderstanding occurring down the track.
You must put your intentions in writing, whether it be a gift or a loan, but especially if it is a loan.
To avoid a mismatch of intentions, the loan agreement should cover such things as the amount and purpose of the loan, how long the loan is going to be for, the lender’s entitlement to interest and whether there is any security being provided for the loan. The loan terms should be realistic and capable of being enforced and adhered-to.
Even if you are making a gift, it is still important to record this intention in writing. If you die and this is unclear, then chances are your beneficiaries will argue about what you have done.
The person to whom you gave the money will argue it is a gift, while your other beneficiaries will argue that it was a loan that needs to be repaid to the estate.
In probate matters we see this often, and it is awful to see a family fighting over something that could easily have been cleared-up from the outset.
It is critical that you record your intentions regarding financial assistance to family members in writing. We can help. Download our free eBook “Bank of Mum and Dad” here.
Who are you lending the money to?
You need to know who you are lending the money to and for what purpose.
Are you lending money to your family member’s business or assisting them (and perhaps their spouse) to purchase their home? In these situations, it’s very important that the loan is formally recorded.
Failure to do so could result in the financial assistance being classified as a gift and ‘gifted money’ can end up in unintended places, for example with a child’s creditors or ex-spouse and can be the source of dispute where deceased estates are concerned.
A written agreement protects all parties. We can help. Download our free eBook “Bank of Mum and Dad” here.
Register the security
If you have lent your child (and perhaps their spouse) money to purchase their home, then you are able to protect your interest by registering a mortgage with the land titles registry of the State in which the property is located, as well as entering a caveat on the title.
By registering a mortgage over the property, you ensure that your loan will be repaid from the sale of the property.
If you are unsure how to register security, we can help. This must be done carefully, to ensure your security is valid and enforceable. We can help. Download our free eBook “Bank of Mum and Dad” here.
Are you receiving Centrelink support?
If you’re receiving Centrelink benefits such as the Age Pension, you will need to make Centrelink aware of any loan you make, even though it involves family.
A loan to family is still considered an ‘asset’ and Centrelink requires you to disclose this information to them. Failure to do so is any offence that can cost you dearly.
Alternatively, if it is a gift then it will cease to be counted as an asset – BUT only after 5 years from when the gift is made.
You should take this waiting period into account when working out the timing of your intended gifts. In other words, you cannot just ‘hide’ assets by giving them away, without there being Centrelink consequences.
What do you need to include in your tax returns?
If you’re receiving interest on your loan, the Tax Office needs to know about it, even though it’s coming from a family member.
As with other forms of income, this will be included in what’s considered your taxable income for the year. Of course, you are not obligated to charge interest.
But if you do not charge interest, then it is absolutely critical that you record the advance as a loan otherwise it will almost certainly be interpreted as a gift.
Is there any time limit on when a loan needs to be repaid?
Each State has a time limit in which a civil claim for the repayment of a debt can be made. A demand made for a loan may be unenforceable if that time limit (for example, 6 years in South Australia) has expired since the date of the loan.
You can re-fresh this time limit by sending the borrower a formal notice that you still expect the loan to be repaid.
Do you need assistance with any of these considerations? We can help. Download our free eBook “Bank of Mum and Dad” here.
How we can help you?
Lending money should be a financial rather than an emotional decision. The bottom line is: can you afford to do it?
You should consider this question from a long-term perspective – in other words, while you might have surplus funds right now, what about later in life, if you were to have a health crisis or a reversal of fortune?
If you have decided to proceed, we can help you formalise your loan arrangements with your family members and register your security interests. If you need to enforce a loan against a family member, we can help you there as well.
On the other hand, if you intend on making a gift then we can help you record this intention in a formal Deed of Gift. Download our free eBook “Bank of Mum and Dad” here.
Genders and Partners is the oldest law firm in South Australia, established 1848. Contact us to learn how to protect yourself, your family and your assets through modern integrated estate planning solutions, by visiting our website today and schedule a free no obligation telephone consultation to find out how they can help you and yours.
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