A gift or a loan? Financial assistance from the ‘The Bank of Mum and Dad’

With increasing financial burdens on the cost of living, it is not uncommon for individuals to seek financial assistance from relatives. Many individuals may turn to the ‘Bank of Mum and Dad’ for money to assist in the purchase of a property, vehicle, or other asset.

The kind-hearted relative who may wish to help by providing a financial contribution such as a lump sum or ongoing assistance, should be aware of the risk and legal exposure.

In Australia, there is a legal rebuttable presumption that money advanced between individuals in certain types of relationships are a gift, not a loan. These relationships include:

  • From a parent to their child
  • From a grandparent to their grandchild
  • From one sibling to another
  • From a husband to a wife (although not the other way around)

This means that if for whatever reason the money needs to be reclaimed by the lender, there is little recourse to do so, often leaving well intentioned relatives high and dry.

How do I protect my interests?

Lenders can protect themselves and their interests by executing a properly documented loan. A written loan agreement may protect lenders in the occurrence of unfavourable circumstances such as:

  1. A child’s divorce or separation from a spouse;
  2. A child’s bankruptcy;
  3. A child’s death before a parent, leaving their estate to their spouse;
How does a relationship breakdown affect a gift or loan?

If your child’s relationship breaks down, any money gifted towards an asset without the execution of a loan agreement, will automatically form part of the joint relationship property pool. The court will look towards written loan documentation, such as a loan agreement, to deduce the third parties’ interest in the assets of the parties. If there is no loan agreement, the court may distribute the assets of the parties between them, without consideration of your interest in the money given.

What about bankruptcy?

Given the current volatile nature of the market, personal insolvencies are continuing to rise. If a child goes bankrupt and the trustee determines that the money advanced was a gift and not a loan, the lender may not be able to be repaid, unlike a creditor.

The distribution of an adult child’s estate?

Although it is a thought not many like to think about, unfortunately there are times where an adult child may predecease a parent or grandparent, leaving their estate to their spouse or partner. In this situation, a loan agreement will assist in the distribution of the estate, allowing liabilities to be repaid, and the benefit of the gift to remain with the lender, instead of the deceased child’s spouse or partner.

Are you or a loved one looking to purchase an asset with the financial assistance of a relative? At Southern Waters Legal we have solicitors who specialise in Property Law, Family Law, Tax Law and Estate Planning to guide you on giving your family a head start, while minimising the risk involved. To discuss your situation, please call us on 9523 5535.

Disclaimer: The information contained in this article is provided as general information only. It is not intended to be legal advice and it should not be used or relied on as legal or professional advice.