There are certain matters to consider before giving money to your child. Do not simply gift/loan money to your child without knowing the associated risks. At Anderson Boemi Lawyers, we understand that as a parent you would want to financially support your children, particularly given the high cost of living in Australia, which is the highest it’s been since the 1990’s.
Nowadays, it is becoming very common for parents to assist their children in securing a home loan deposit by providing the funds either by way of a gift or by a loan agreement. If you decide to provide funds to your child, please consider the following risks and seek both independent financial and legal advice before making an informed decision.
Still, the main question remains that is whether to gift or loan to money to your child.
If you decide to gift money to your child, then there is a risk that this gift may end up becoming part of your child’s matrimonial assets should your child divorce. In these circumstances, the money would most likely become part of asset pool and divided by the Court between the parties, and this may not be in the best interests of your child.
To give this context, we provide the following scenario of parents gifting money to their child and how it may play out:
Mum and dad give their daughter, Noelle $50,000 for a deposit to purchase a house. Noelle accepts the money and uses it to purchase the house. Noelle then decides to get married to Joey but their relationship breaks down and they divorce 5 years later. Assuming that there are no other assets other than the house which is still worth $400,000, the Family Law Court decides to make property orders and awards Joey half of the value of the property minus any liability (i.e mortgage payout). The house then becomes the only asset in the matrimonial asset pool and the parents cannot recover the money because the Court simply would not give any weight to the fact that the parents provided a gift.
However, if in this scenario the parents provide a loan to Noelle then the Court outcome may be different as the Court may recognise the loan agreement as a liability. However, it must be a legitimate loan and not deemed a gift. The Court considers the following factors when determining whether a loan is true and genuine:
Moreover, if the loan agreement is with your child and his/her partner, make sure that the loan agreement is in both names as you may then be able to lodge a caveat to protect your interest.
Similarly, in situations where your child becomes bankrupt, you as a parent may seek repayment of the debt if there are other creditors which would otherwise be the case if it is a gift.
Money gifted to a child is not recoverable if a child dies and the form may form part of your child’s estate and distributed in accordance with their Will. However, money provided to your child by way of a loan is a debt of the child’s estate and should be repaid to the parents.
Please note that advice provided in this article is only general advice and we strongly suggest you seek both legal advice and financial advice before deciding on whether to gift or loan money to your child.
The content of the Anderson Boemi Lawyers website is provided for information purposes only. The contents of this website do not constitute legal advice and should not be used as such. Formal legal advice should be sought in particular matters. If you have a particular matter you need legal advice for, or you have any questions about our disclaimer please contact our office on (02) 9653 9466.