It is not uncommon for parents to want to help their adult children financially. This help may be in the form of an asset, or as cash, for example a deposit so their child can purchase their first property.
Whilst some clients talk about giving their children an “advance on their inheritance” it is important to be aware of some asset protection and estate planning implications around gifts for children. In some cases, it may be worthwhile providing a loan, rather than a gift.
Risks of Gifts
A gift to a child from a parent is very straight forward. It requires simple documentation such as a deed of gift. However, once you give money to your child it becomes property of their relationships.
For example, if your child subsequently experiences a relationship breakdown, the money that you have gifted will be considered as part of the asset pool for division between your child and their former spouse.
In another scenario, if your child is declared bankrupt, or held personally liable as company director, their assets including those received from you will be under threat from creditors.
In contrast, a loan from parents to their child provides better asset protection, especially if there is loan security. With appropriate loan conditions, if your child goes through a relationship breakdown you can recall the loan and the amount you lent them. This enables family wealth to return to the parents.
Requirements of a Loan
If you decide that you want your children to benefit from some of their inheritance early through a loan, then a written loan agreement is essential. The terms can be as favourable as you wish. The loan agreement should specify the amount, details of repayment, interest if applicable, what happens in the case of default, and a form of security such as a mortgage over a property. Evidence of enforcement, for example proof that repayments have been made, will support the view that the loan is legitimate.
It is recommended for the child to receive independent legal advice when drawing up a loan agreement.
You also must clarify in your Will whether the loan is to be forgiven or be treated as an asset in your estate. This question may be influenced by whether you have provided equivalent loans to all children. If you decide to forgive the child of the loan, this should apply also to the estate of the child, in case the child predeceases the parent.
In either the case of a gift or a loan, we strongly suggest obtaining legal advice, to ensure that all implications of an early inheritance are considered with regard to your circumstances, and that your estate plan is appropriately adjusted. Please call Andrew O’Donnell or myself on (02) 9908 9888.