What you should know about lending money to adult kids
Martin and Joanne* helped their daughter, Anna, and her husband, Christopher, buy into the booming Melbourne property market when they were expecting their first child.
They stumped up $300,000 to cover the deposit and to keep the mortgage repayments more manageable on their $1 million home so Anna could take time out of the workforce to spend with her baby, Esther.
Ten years later, Anna and Christopher separated. Christopher made a claim on half the house, even though $300,000 was a gift to Anna.
More parents who have the financial resources are helping their grown-up kids get into the property market. But how do parents protect a gift to their child in case their relationship breaks down?
First, never give your children a lump sum, says Robert Monahan, a lawyer specialising in estate and succession planning and director of HLB Estate Services.
Always lend them the money with strings attached so you can get it back if you need it in your old age. This also separates the money from other assets in case the relationship breaks down.
Never rely on a verbal agreement between your children and their spouses. Draw up a loan document properly. Put everything in writing with rules about the loan, because once a couple break up their recollection of the arrangement can be challenged.
Parents need to weigh up how they want to structure a loan to their kids. Do they take into account interest or inflation or the average growth in property prices?
"There is no right or wrong way, it is what is appropriate," says Monahan.
Seeing a lawyer to draw up a loan doesn't have to cost a fortune. Monahan's estimate is a couple of hundred dollars if it is straightforward, or around $1000 if you use a lawyer to register a mortgage.
Banks take into account a loan from parents when drawing up a mortgage.
They need to be satisfied about the condition of the loan and the resources to repay it. For this reason, parents often don't demand interest to be repaid at the same time as the bank's mortgage is being paid down.
A loan isn't always for property. Monahan says parents also help fund super balances. At present, non-concessional contributions of up $180,000 a year are allowed (or up to $540,000 under the two-year bring-forward rule if you are under 65).
Some parents also lend their kids money for their grandchildren's school or university fees. Monahan says you don't need to adjust your will every time you lend money to your kids.
Some parents keep a ledger of the loans and Monahan recommends giving a copy to a lawyer, accountant or financial planner. If you see a financial at least once a year, then it makes sense to keep the detail with a planner.
There are plenty of cases of loan documents kept at the parents' home going missing when a parent dies.
Monahan says it is common for parents to help one of their kids more than another, so often they want this adjusted in the will so that the children without the financial assistance are compensated when they die.
For family harmony, Monahan encourages his clients to sit down with all the family members and tell them what they have done and what the issues are.
"If you leave it until the parents are dead, then trauma and grief can cloud their children's perceptions of the arrangements, particularly in blended families. Often stepchildren will take it out on the step-parent."
* Not their real names.
Play it safe
Sit down with everyone and discuss the issues - money should never be a gift to a child, always a loan.
- Don't rely on a home-made loan agreement. Get a watertight document from a lawyer. Expect to pay from $200 for a straightforward loan or about $1000 if you use the lawyer to register a mortgage.
- Tell all family members about any loan given to one child, and how other children without a loan will be compensated.
- Keep a copy of the loan document with the lawyer, accountant or financial planner as well as having one at home.