Parents making loans to children
1. Sad parents
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.
2. Smart parents
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 children
There is nothing wrong with helping our children financially. It could be for their first car, grandchildren school fees, a holiday or a property. But protect the money in case:
1. they divorce
2. go bankrupt
3. suffer from drugs
4. suffer a mental condition
5. stop loving you
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.
With loans to children, never rely on a verbal agreement. Build a Loan Agreement 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.
Any tax issues?
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.
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
What do you get?
Press '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
Contact us for more legal advice
You are building your loans to children Loan Agreement on a law firm’s website. Telephone us for legal advice. We can help you answer the questions.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers & Solicitors
National Australian law firm
39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
Reception: 1800 141 612
The Borrower (child or a related party controlled by the child) is the entity (human or company) who is going to receive the capital (e.g. money) from the lender (mum & dad, or one of their entities).
The Lender is the entity (human or company) who is passing the capital (e.g. money) to the Borrower.
In this Loan Agreement, the person who is the Lender is lending the money and the person who is the Borrower is the person borrowing the money.
Why is it better to prepare my legal document on a law firm's website?
You are dealing directly with a law firm's website, therefore you:
- retain legal professional privilege,
- benefit directly from the law firm's PI insurance
- receive legal advice from us.
- You are supported by our 100% money back guarantee on every document you build.
How do I build the Loan Agreement?
Answer the questions on our website
Read the Summary page
Lock and Build your document
Type in your Credit Card details
The Loan Agreement, our covering letter and Tax Invoice are emailed to you
Print and sign the Agreement
What do I get?
You will receive an email that contains:
Loan Agreement Document
Our law firm's letter of advice on our law firm's letterhead and signed by one of our Partners.
Sometimes you don't know the amount that you are lending. If you don't know you can leave it as the default answer; "as lent from time to time". This gives you some wiggle room.
If you do know but are paying it in instalments, then put it all in as one figure.
Otherwise, just put in the total figure. Remember to put in the dollar sign.
Sometimes you might not want to set a specific date in the agreement. You can leave it as the default answer; "payable on demand as demanded by the Lender". This gives you some wiggle room.
If you want it all paid back on the one date, just enter that date in.
Word it how you like. For example
1) "Payable in instalments of 10% per calendar month"
2) "Half to be paid on 21 September 2018, and the remainder to be paid on 21 September 2019"
3) "$100 to be repaid weekly for 10 weeks starting from 4 July 2018"
There are five ways you can answer this question depending on how you'd like to do it:
1) If you are charging no interest, put the word "Nil"
2) If you aren't sure what the interest rate is yet, leave it as the default, which is "as demanded from the lender from time to time"
3) You can put in a flat rate, for example, "5%" (don't forget to put the % sign in)
4) Keep it variable, for example, "2% above the Commonwealth Bank interest rate".
5) You can also use the inflation rate. You could word it something like "calculated according to the percentage increase in the Consumer Price Index (all groups) for the average of the capital cities of the Commonwealth of Australia (as published from time to time by the Australian Bureau of Statistics or body that takes over that function)".