A child is a gift I’m told
A treasure who in time unfolds
And soon enough, that gift from heaven
Will now become the gift who’s given
“I need some dough”, the plaintiff cry
And parents may now wonder why
Why years of scrimping never cease
Till death, it seems, to keep the beasts.
The poem may seem a little harsh, you may well say. But we live in an age where we fatted cows of the baby-boom era will inevitably be called upon to help the children with a house purchase, whether just the deposit or more.
So why may the law be relevant? There are a number of things to consider, including:
Whether to make the advance a gift or a loan?
Family law deals with gifts and (genuine) loans differently if the child’s marriage or de facto relationship breaks down. In short, a gift becomes part of the asset pool for division and even though some weight is given in favour of the child, it is generally not as assured as a parent retrieving a loan.
Structuring the loan
Two points of which to beware:
1.If a gift sets no timeframe for repayment or is merely repayable “on demand”, the law says that the gift falls due and is payable as soon as it is given. This legal principle applies in both general law and family law.
The principle may seem academic but because of the Limitations Act (our statute of limitations), loans become legally unenforceable 6 years after they fall due. This does not cater well for the 7-year-itch relationship! [If the loan is by a formal contract which we call a deed, then 6 becomes 12].
Therefore, the loan should be drafted to become due at a specified time such as 28 days after written demand is made to the borrower. Although seemingly a minor variation on “upon demand”, it actually sets a future point in time from when a specific form of demand (writing) is made. The limitation period then starts from the future due date.
2.A second issue arises when the child’s bank requires that the money advanced be declared to be a gift. This is a common occurrence. If you make this declaration, then it will obviously contradict any loan document you prepare.
A better option is to declare that the loan will not be payable until the earlier of the repayment of the loan to the bank/the child’s death. The lending bank must agree to such a declaration, but it has been done by lending institutions before.
Parents will have different attitudes with regard to repayments/interest from the children. Some will not want any repayment at all whereas others are merely seeking to substitute for the banks. There will be those parents who are keen to help their children but do not want the children to form the view that the loan is without obligation. One option for these parents is to require payments not to the parents themselves, but to a superannuation fund so that the children are thus investing in their own families’ future. We have structured loans to this effect.
In your Will, you can deal with loans/advances to children in different ways such as:
1.By forgiving the loan;
2.By advancing in favour of the other children you may have, a comparable amount as a pecuniary legacy before the residue is distributed;
3.By making the amount of the loan adjustable against any benefit the child is to receive under the Will (referred to in law as “hotchpot”).
If you are planning on lending or advancing money to a child/ren, you may wish to explore the above themes with us first. Please call Mark Squire on 8448 9854.