Loans to children

Parents making loans to children

Sad parents – no Parent to Child Loan Agreement

Mum and dad give their daughter, Joanne $400,000 to buy a house. She then marries Ken. Ten years later Joanne and Ken divorce. The house is still worth $400k. It is the only asset of the marriage. The Family Court awards $200k to Ken. The Family Court is not interested that the money was a gift from Joanne’s mum and dad. Instead, loans to children are safer.

Smart parents – legally prepared Parent to Child Loan

Mum and dad lend $400,000 to their daughter, Joanne. Joanne signs a legally prepared Loan Agreement built on Legal Consolidated’s website. Joanne purchases a house with the money. She marries Ken. Ten years later they divorce. The house is still worth $400,000. It is the only asset. The Family Court is shown the Loan Agreement. The Family Court orders that Ken gets nothing. This is because the assets of the marriage are nil.

To protect your loan build a legally prepared Loan Agreement – on a law firm’s website. Homemade loan agreements may not work. They carry less weight with the Family Court and Bankruptcy Court. Why take the risk?

But I love my child – a Loan to my child seems harsh

There is nothing wrong with helping our children financially. It could be for their first car, grandchildren’s school fees, a holiday or a property. Today it is becoming more popular to help out our children with a home deposit, but simply giving away the money has real risks. It is important to protect the money in case:

1. they divorce
2. go bankrupt
3. suffer from drugs
4. suffer a mental condition
5. stop loving you – ‘King Lear’ offers his daughters his Kingdom for the return of their love, but after they promptly abandon him
6. you run out of money yourself, in your old age

Documenting loans to children

Never ‘give’ your children money. Always ‘lend’ them money ‘payable on demand’. Get it back if something goes wrong. Treat yourself like you are a bank, and your children are taking out a loan.

Creating a loan agreement not only protects your own interests but also benefits the child as you can decide in the future to forgive the loan while you are alive or in your Will.

With loans to children, never rely on a verbal agreement. Press the Build button and build a Parent lends Money to a Child Loan Deed on our website. We are Australia’s only law firm website providing legal documents online. It puts everything in writing with rules about the loan.

“Payable on Demand” seems a bit harsh for my loan to my son

Q: Under “Payment Date” I currently have your default words “Payable on demand as demanded by the Lender“. It does sound a little threatening. My situation is that I do not wish the loan to be repaid. But rather that my son’s entitlement under my Will is reduced by the debt amount when that time comes. My son is a beneficiary in my Will, alongside with our two other children – equally shared.

A: You are at war, Neville Chamberlain. Your son is only one of the enemies. The Loan Agreement is contested in the family court by your son’s first wife, second wife, current mistress and his gay partner – all at the same time. The trustee-in-bankruptcy claims the Loan Agreement is a fake. War is ugly. Toughen up to Winston Churchill level. Do not be weak.

Further, the Loan Agreement is structured to protect you and your son. Automatically, your son’s entitlement is reduced accordingly at your death because you made it ‘payable on demand’. Keep the Loan Agreement with your Will so it is not forgotten at your death.

Finally, you may want the money back if you run out of money. I am not sure if you are worth a billion dollars. But I have acted for billionaires that have run out of money. 

Tax issues when lending to children?

There are no tax issues. The interest rate for the loan is ‘as advised by the Lender’. Therefore, while the interest rate is zero you have no income tax issues. If the child separates you can increase the interest rate to draw more money out of the failed relationship. There is less money for the Family Court to give to your ex-in-law.

A loan isn’t always for property and the grandchildren’s school fees. You can also fund the children’s Superannuation fund. Speak to your Financial Planner and Accountant.

At different times, it is common to benefit one child over another with money. If you benefit one child over another then it is adjusted automatically at the time of your death. Say you lend one child $500k and the other child $300k then that is adjusted at your death. So it is all fair again.

Help son and his girlfriend buy a home – but sign the Parent Lends Money to a Child Loan Agreement

Q: The bank is lending money for my son and his girlfriend to buy a home. I am also loaning $283,000 to them.  We are going to do the same for our daughter when she gets older. How does the Loan Agreement incorporate all these expectations?

A: It doesn’t. You are not writing a Charles Dickens novel here. You are merely lending $283,000 to your son. The Loan Agreement does not record what he does with the money. He may give the money to his Church. That is his call. Start building the Loan Agreement. Consider the default answers we provide. They probably work best. 

Let us now talk about the future loan to your daughter. You may die tomorrow. In this case, the loan to the daughter never happens. That is fine. Your son still owes you (or rather, your deceased estate) the money. So you are all square between your two children. Well done.

Son buying a property 99% in his name. And 1% in his wife’s name. Who is the Borrower?

Q: I am lending money to my son to buy a property with his wife. Ownership will be 99% in my son’s name and 1% in my daughter-in-law’s name. There are no other debts. And the property will not have any mortgages. Should the Loan Agreement reflect this or is it not relevant? Who is the Borrower?

A: I need to make four points.

1. You are not lending the money for any particular purpose. Your son may drink and gamble away the money. Or he may burn the money. Or he may use the money to travel. A Loan Agreement does not set out the purpose of the loan. You are just lending money. What the Borrower does with the money is up to them. It is none of your business. If you are not happy with that, then do not lend them the money.
2. Both your son and his wife are the Borrowers. They owe the money 100% each. It is a ‘joint and several’ liability under the Legal Consolidated Loan Agreement. If the son goes bankrupt, the daughter remains responsible for owing you 100% of the money. What they use the money for is not relevant. 
3. The rule of thumb for a Loan Agreement is to lock in as many Borrowers as you can. The more people that agree to repay the debt the stronger your chance of getting your money back.
   So make both the son and his wife the Borrowers.
   If you can make his wife’s mum a guarantor, that would be nice. And, if the wife has an Uncle Harry then make Uncle Harry a guarantor as well. The more people owing the money or guaranteeing the debt the better your chances of getting your money back. 
4. It is none of my business, and it is not relevant to the Loan Agreement but I am guessing that the 99% and 1% structuring is because of one of these reasons:
   • My son has wealth. His pretty dizzy wife has nothing. Therefore, I as the controlling father, want my son to own most of the property.
     Fair enough. However, be aware that after about 8 – 12 years the Family Court may order half or even all of the equity (if any) in the property to go to his ‘dizzy’ wife. We are not family lawyers. Speak to a family lawyer if you want more advice on this.
   • There is a land tax benefit in having 99/1%.
     I do not believe that is correct. I do not believe that this old strategy works in any Australian state or territory. Speak with your accountant.
   • My son is a stay at home father. His wife is a business person and, like all business owners, is at a higher risk of bankruptcy. So the 99/1% is for asset protection.
     This is a good asset protection strategy. I agree. (I assume the 1% is in case your son ‘secretly’ sells the property under his wife and leaves the country. As she will have ownership (albeit only 1%) she must agree to the sale.)

Does the Child Loan Agreement conflict with the bank lending money?

Q; I am lending money to my daughter and her partner. A bank is also providing them with a loan. The bank is lodging a mortgage over the property (Property). The Bank will not want our parental Loan Agreement repayable “on-demand”, such that we may get paid before the Bank does.

Does the Legal Consolidated Loan Agreement permit me to amend such document, to the satisfaction of the Bank? 

A: I have no interest in what a bank wants. You are lending money to your daughter and her partner. I am not sure what that has to do with the bank. I am not sure why you are sharing private family matters with a third party. The only interest I have is you getting your money back from your daughter and her partner at some point in the future. And that is what the Loan Agreement is intended to do. Because the bank has a mortgage over the property its rights are, sadly, stronger than yours. If I could provide you with a Loan Agreement to override the bank’s interest then I would do so. Having the Loan Agreement payable “on-demand” does not give you a greater right over the bank. I wish it did. But it doesn’t. However, repayable ‘on demand’ rather than specifying circumstances for repayment (e.g. house sale or divorce) keeps a wider range of circumstances open, thereby protecting the lender.

Secondly, the Loan Agreement does not state what your daughter will do with the money you are lending her under the Loan Agreement. Your daughter may give the money you lend her to a friend or buy clothes. It is her business what she does with the money. The Loan Agreement just states that you are lending her money.

Thirdly, the Loan Agreement gives you the right to lodge a caveat over any real estate your daughter owns – anywhere in Australia. This includes the Property. But if you try and lodge a second mortgage, equitable mortgage or caveat over the Property then the bank will have an issue with that.

Does the bank (with a mortgage over the home) need to know about this Loan Agreement?

Q: Our son and his wife of five years are renting a property. They are currently looking to purchase their own home.

I am loaning them $250,000 as a big deposit. Both our son and his wife are the Borrowers. So they will both owe me the money.

They will borrow a further $350,000 from a bank. The bank will put the first mortgage on the title.

Our son is a builder and like all business owners is at risk of going bankrupt. (We loved your asset protection strategies.)  Good asset protection suggests the home be put only in our son’s wife’s name only. 

1. Does any first mortgage lender need to be consulted to see if they would allow our second mortgage?
2. What happens if my son divorces and the home is solely in his wife’s name?

A: The Loan Agreement is a private family matter.

Banks do not like second mortgages. They are complex, expensive and rare. While not as safe as a mortgage, consider just lodging a caveat with the Loan Agreement attached over the property, after the settlement.

You have a fundamental misunderstanding of how divorces operate. The family court has no interest as to who owns the ‘matrimonial’ assets. The home could be in your son’s name, his wife’s name or a Family Trust. It makes no difference. The family court puts all the assets in a bucket. It stirs the pot. It then pours out the assets as the family court sees fit.

Obviously, if you have a legally prepared Loan Agreement, then the loan is paid out before any payout to the daughter. That is one of the main reasons for building the Loan Agreement.

How to lodge a caveat or mortgage using the Loan Agreement

1. Build and sign your Loan Agreement.
2. Complete and print out the Caveat or Mortgage form (free download from the titles office):
   • New South Wales: Land Registry Services
   • Victorian: Land Registry Services
   • Queensland: Department of Resources
   • Western Australia: Landgate
   • South Australia: Land Services
   • Tasmania: Land Titles Office (all States use to use this name originally. Tas is the least arrogant titles office in Australia)
   • Northern Territory: Land Titles Office
   • Australian Capital City (ACT): Land Titles Office
3. Lodge the Caveat or Mortgage with the above relevant titles office.
4. Other than South Australia, which are difficult to deal with, the relevant titles office helps you. If you are in doubt get your conveyancer, settlement agent or property lawyer to lodge the caveat or mortgage for you.

When making loans to children:

1. talk with all your children together about the loans
2. never gift children money – only loan them money (this protects both you and them)
3. don’t rely on home-made loans or IOUs – build a Loan Agreement

Child Loan Agreement on back of an envelope?

In the movies, IOUs are often handwritten on a piece of paper. Sometimes instead of a Loan Agreement, someone does a ‘minute’. Both approaches fail. In Rowntree v FCT [2018] FCA 182 shows the additional care required to document even simple related-party transactions, such as loans. In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m from his group of private companies. The Court said:

‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.’

He failed. Only a legally prepared Loan Agreement satisfies the ATO, Bankruptcy Courts and Family Court.

Cheeky son refuses to pay Dad back

In Berghan v Berghan [2017] QCA 236 the son borrows money from his Queensland aged father. The son refuses to pay it back.

The son, in the first court case, successfully argues that the monies were given to him as a gift.  However, the Court of Appeal held that the amounts were loans.

Portrait of an ungrateful child taking

The son’s company suffers financial stress.  The son gets $98k from this Dad. The boy continues to borrow more money from dad.

Later, the son borrows his father’s credit card. The boy clocks up another $13k of debt.

First court case – child wins  – no child loan agreement

His Honour said that Dad failed to prove a legal binding agreement. There was no paperwork. There was no written loan agreement.  It was a gift.

The Judge said:

• The son promised to look after his Dad in old age. But that was just a moral obligation.
• Dad is making the payments to the son, for the benefit of the company, was simply discharging his parental obligations. This is because their daughter was an employee at the son’s company.  The money was therefore of a charitable nature. Dad was protecting the son’s company so his daughter would keep her job.
• Dad allowed his boy to use the credit card when the boy was injured and impecunious.  These circumstances are charitable.

Good sense prevails in the Appeal – child loan agreement inferred

The Court of Appeal had a better sense:

• The lengthy period it took Dad to make a demand for the money does not count against his assertion that a breach of contract existed. The Court held post-contractual conduct is not taken into account when interpreting the terms of a contract.
• The motive Dad had in transferring his son the money, be it “charitable” or otherwise, was not relevant.

The Court set aside the decision of the District Court.  The Court said that the monies were paid with an understanding that they would be repaid. This was an “inescapable conclusion”. The transactions were a contract of loan. The Court gave judgment in favour of Dad of $286k including interest.

This is another example of elder abuse. The decision shows the perils of not signing a loan agreement. Going to Court – twice in this instance – was expensive and exhausting for the aging father. 

What happens if your child has a partner and buys a home?

What if your child has a partner? The loan agreement may change depending on whose name the home is purchased under. Best that your child signs the Loan Agreement and buys the home just in their name. This binds your child alone, and the partner has no say in the matter. What if the partner objects? It is important to stay firm and explain it is ‘to protect your interests, it is nothing personal’. This protects yourself and your child, if the relationship with the partner does not end up ‘happily ever after’.

What happens if the home is purchased in both your child and their partner’s name? Then both your child and their partner sign the Loan Agreement. Our Loan Agreements allows the loan to be lodged as a caveat. Or our Loan Agreement can be registered as a second mortgage – but the bank is notified. So caveats are more common.

Additional money to help child buy first home

Often a parent wants to help a child with the deposit on their first home. The child may need more equity. In this case, build this Loan Agreement. You can lodge a caveat over the property after the bank has registered the mortgage – if you wish to. The banks do not like this. But it is your right to do so.

What if the child uses the money for another purpose? The Loan Agreement does not document what the Borrower does with the money. The Borrower is free to not continue to buy the home. The Borrower may decide to use the money to go on a holiday. The Loan Agreement has no strings attached. It has no purpose other than to lend money to a Borrower. What the Borrower does with the money is no business of the Lender.

The child loan expires – if a few dollars are not paid within 6 years

Q: I read your comments that loans expire every 6 years (e.g. the ACT) and one way to ensure that it continues is for the borrower to make a $1 payment before the end of the 6 years. As I am sure that in 6 years I will not remember this requirement, would this be easier to manage by including a yearly token payment (under “Payment Date”) of say $10?

A: That does not work. You need to diaries the payment. Before the 6 year anniversary of the loan, if nothing has been paid, then:

1. 1. the child hands you $10 with a note to say that this $10 is towards the payment of the loan; or
   2. the child transfers $10 into your bank account and then sends you an email to say that this is towards the repayment of the loan. (The email does not need to be signed.)

Print out and keep such emails and notes with the Loan Agreement. 

(Otherwise, place a $10 note, on behalf of your child, in the Loan Agreement Deed. And ‘post-date’ a note by 5 1/2 years signed by your child stating “Dear Dad, I attach $10 in part payment of my loan to you, signed your son”.)

Legal Consolidated Loan Agreements are specifically designed to allow for the above. If you do not have a Legal Consolidated Loan Agreement then speak to the lawyer who prepared the Loan Agreement as to who the Loan can be acknowledged within 6 years.

Buy a home just in the child’s name?

Q: My daughter is married. I am going to lend her money to buy a home. Should she purchase the house only in her name? How does this benefit my daughter or me?

A: Firstly, your question does not relate to building a Loan Agreement. Your daughter could borrow the money and give it to her church. Or burn the money out of spite. What she uses the money for is her business. The Loan Agreement does not require that she purchase a home.

Secondly, the Family Court does not care about whether your daughter or her partner is the legal owner of the property. Speak to a Family lawyer. 

But there is nothing wrong with lending the money to just your daughter. The Family Court and bankruptcy Court will acknowledge that you are owed the money.

Daughter and husband separate – is the loan taken into account?

Q: What if my daughter and her husband separate? The $1m home goes into the matrimonial asset pot. But does the Family Court take into account the debt? This is the Legal Consolidated Loan agreement ($200k) and the Bank mortgage (500k)? Therefore, is only the net figure of $300k available to the Family Court to share? ($1m – $700 = $300k equity)

A: That is correct. And that is a major advantage of building the Legal Consolidated Loan Agreement in the first place. Well done. You get it.

Alternatively, you may just ‘hand over’ the $200k. Was it a gift? Was it a loan? By getting your daughter (and her husband, if you can) to sign the Legal Consolidated Loan Agreement at least a day before you hand over the money you protect both your daughter and you.

Best to add both your daughter and son-in-law as the Debtors. This is as you build the Legal Consolidated Loan Agreement. So that both are responsible for the debt. The more people responsible for a debt the higher the chance you may get your loan repaid. It also stops the son-in-law from arguing that he knew nothing of the Loan Agreement.

What if the son-in-law (or daughter for that matter) do not want to sign the Legal Consolidated Loan Agreement? That is fine. Keep the money. And go on a holiday!

Should the home just be in the daughter’s name?

Q: How then is it more advantageous if the house and the loan agreement are in the name of my daughter only? How is keeping the partner out of it a benefit?

A: Again, we are not family lawyers. The family court puts everything in the pot. So, it may make little difference. But, as to the Loan Agreement, better to have as many people as possible be responsible for the debt.

Also, consider asset protection issues in having the home solely in the name of the ‘person of substance’. And not in the name of the high risk of bankruptcy husband.

Your Loan Agreement vs Bank Mortgage

Q: I am using your Loan Agreement to lodge a Mortgage or caveat over some of my daughter’s properties. These forms are freely available on the local State titles office website. Both seem easy to prepare and lodge. But you indicate a Mortgage form is more problematic with the bank that is providing the ‘main’ money. Or rather ‘first’ mortgage. Is this because a financial institute is notified by the titles office of a second mortgage? But caveats do not get to the attention of the bank?

A: That is usually correct. A bank needs to do title searches to find a caveat. Which is rare after the bank mortgage is lodged.

We do not provide advice on lodging securities:

• such as caveats and mortgages over real estate; and
• over cars and other chattels on the national Personal Property Securities Register PPPS.

So, we cannot comment on your view that mortgages and caveats are ‘easy to prepare and lodge’. They need to be done with care.

The Legal Consolidated Loan Agreement gives you the right to lodge such securities. But we do not give you advice on securities and how to register or lodge them. If you need a hand consider instructing a conveyancer, settlement agent or lawyer to help you with what you need.

Why is a caveat weaker than a mortgage?

We do not give advice on securities. We are only providing you with a Loan Agreement. The Loan Agreement authorises you to lodge and register securities.

A mortgage is similar to a caveat. But a Mortgage is the more secure and enforceable. A caveat is indeed weaker than a mortgage. 

Do I need to update my Will after I do the Loan Agreement?

You need to review your Will every few years. This is to make sure it still reflects your wishes.

However, you probably do not need to update your Will now that you have the Loan Agreement in place. In fact, an advantage of a Legal Consolidated Loan Agreement is that you do not need to keep updating your Will.

Let me explain, with this example:

Loving Dad is going to gift $300k to each of his three children. This is when they each buy their first home. Child one buys a home. And then child two buys a home. But before child three buys a home, Dad dies. The third child misses out on getting the $300k.

Instead, the loving dad lends the $300k as each child buys a home. So now child one and child two must pay back the $300k at dad’s death. So, child 3 does not miss out. The Loan Agreements correct the Will on a continuous basis. They make the Will fair. This is without the need to keep updating your Will all the time. (You get free Will and POA updates for the rest of your life. But you need to remember to update your Will.)

If all three children get the $300k then that is fine. The children are getting everything in Dad’s Will equally, anyway.

Also, if the child:

1. 1. gets divorced or bankrupt the Loan Agreement is beneficial
   2. actually pays back the loan (uncommon, but it does happen!) then the Will automatically self-corrects, the children are always treated fairly and equally with the Legal Consolidated Loan Agreements in place

What do you get when you build the Parent to Child Loan Agreement?

Press the ‘Start Building’ button above to get our:

1. Loan Agreement – ready to sign
2. Law firm’s letter of advice. Press the above “Sample” button to see a sample