The "Bank of Mum and Dad" is a commonly heard phrase nowadays, stemming from a combination of high housing prices and low level of affordability given Australia’s rising living costs.
Many parents and families are in a fortunate position to be able to provide their children and even grandchildren financial assistance for their first property purchase.
Protecting assets and wealth for future generations is a common goal among many families. Clever estate planning may offer some protection, however, often ‘loans’ made to children from the Bank of Mum and Dad risk being overturned or treated as gifts if your child’s relationship breaks down.
Going to court is expensive and can be a difficult experience, so many financial separations are agreed upon out of court through mediation. Being well prepared is key to being in a position of strength for the negotiation process and having the best chance of protecting family capital.
Unless the loan is properly documented, structured, secured and treated accordingly, it will be difficult to argue that the capital was not “gifted” rather than loaned to the child and their partner. Therefore, it may be considered part of the marital assets and available to be split in family law proceedings.
Having a properly executed loan agreement, prepared by a suitably qualified legal practitioner is just the starting point. Ideally, the loan should also be secured against the property by first or second mortgage (where a commercial lender is involved). This mortgage should also be registered on the title deeds.
Whilst the form of the arrangements is important, so is the substance of the arrangements, and both must be aligned. This means the child must declare the loan to any other bank financing the purchase. Not reporting the loan to the bank could be construed as evidence there is no loan in place particularly as it is a disclosure requirement under the Consumer Credit Act. If Mum and Dad were to refinance an existing loan or perhaps apply for a credit card, similarly, they would be required to include the loan (which is an asset of them) in their application.
If the loan is being made both to the child and the child’s partner, they should be encouraged to seek independent legal advice in relation to the loan. As expected in a legal matter, all elements of the transaction are subject to later scrutiny.
If the money is being loaned via a family company to a child, then proper Division 7A loan agreements must be in place and there needs to be evidence of repayment. If the loan comes from a trust, then the financials for the trust must record the loan balance and record changes to that balance by repayments of interest charged.
Parents also need to be very conscious of statutory time limitation periods. If the loan is just said to be repayable on demand, then unless the loan has been refreshed, there is a six year time limitation period after which the loan 'expires'.
For example, Mum and Dad lend their daughter $1 million in 2016 to purchase an apartment in Sydney. The loan is just repayable on demand and never called on, then in 2024 the daughter's marriage breaks down. The parents are likely to be statute barred from calling in the loan as more than six years has passed. That $1 million and the extra equity it has created in the Sydney property market, is now up for grabs in the family law courts. This can be prevented through proper planning and documentation.
Too many times, family arrangements are done informally and not documented, often put in place around the kitchen table without formality. That spells disaster later on if the parents try and claim they are owed money. Considering these factors and taking the necessary steps are very important to substantiate the existence of the loan. After all, putting it in writing and making it official is much easier to enforce legally than a verbal agreement.
Paul Aliprandi is a senior private wealth adviser at Wilsons Advisory providing strategic planning and financial advice. Contact Paul if you would like to discuss any of the points in this article. paul.aliprandi@wilsonsadvisory.com.au
Written by
Paul Aliprandi, Senior Private Wealth Adviser
Paul Aliprandi is a senior private wealth adviser at Wilsons Advisory providing strategic planning and financial advice.
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