It is not uncommon these days for parents to provide their adult children with large sums of money to assist with property purchases. However, often there is little thought as to how this provision should be documented or classed. Is it a gift or a loan?
The lack of documentation around this provision can cause conflict between the children when the parent dies, as some children may argue that the gift was actually a loan or that they received less from their parents during their lifetime, which they argue should have been adjusted in the parent’s Will.
As explained in our previous alert dealing with loans and family law proceedings here, there are various family law considerations and advantages of documenting a gift as a loan agreement.
Further, it is also crucial for parents to update their Wills when entering into such agreements or if they elect to only make a gift rather than a loan, in order to account for the following considerations:
- Do you want your child to have to repay the loan on your passing or will it be forgiven?
- Will interest be charged and if so, at market rate?
- If it is to be forgiven, do you want to equalise the position between your children if you have only made the gift or loan to one child;
- If a gift was made rather than a loan, should a similar be gift be made to the other children? If so, how do you factor in inflation?
- If there was a security registered over the child’s property in connection with the loan, will the security be discharged and on what terms?
- What are the consequences on the division of your estate if the child did not repay the loan?
These kinds of questions can be discussed and worked through and properly documented in your estate planning documents.
How we can help
If you, or someone you know is considering advancing funds to their children, please contact Ilana Kacev or Clare Hesbrook in our Wills and Estates team to discuss the best way to reflect any gifts or loans in your estate planning documents.
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