For us, 2023 was a remarkable year for family finances. As a lawyer, I’ve seen a surge in parents seeking guidance on drafting loan agreements for their children. The reasons differ from family law concerns, bankruptcy, not wanting to give the kids’ a ‘free ride’. This trend is a clear indicator of the evolving dynamics in family lending, and it brings to light the critical role of formal loan agreements.

Let’s explore why these documents are not just paperwork but pivotal tools in family financial management.

 

1. estate planning: more than just wills and trusts

Estate planning isn’t just about wills and trusts; it’s also about how you manage your assets while you’re alive. A common dilemma for parents is deciding whether financial assistance to their children is a gift or a loan. Here’s the catch: if you take out a loan, your estate will include it, and will deal with it in accordance with your will. Since executors can’t read minds, clarifying the intention when giving money to your children is crucial. Within your will, you have 2 options: forgive the loan or count it towards the child’s inheritance.

You can learn more about our Estate Planning services here.

 

2. family law: avoiding unintended consequences

Imagine this: a simple, interest-free, unsecured, at-call loan to your child somehow ends up in their property settlement. It sounds far-fetched, but it’s a reality in family law. Where you can’t coax your kids into getting a financial agreement [prenup] with their spouses, then to prevent your well-intentioned loan from being misconstrued as a gift, it’s crucial to set it up with clear, fair, and commercial terms. This approach can save a lot of heartache and financial confusion down the line.

 

3. asset protection: securing your financial future

When you loan money to a child, you want to ensure this money remains an asset for you, especially if the child faces financial difficulties in the future. Securing the loan against property is a wise move. It not only gives you priority in repayment in case of bankruptcy but also aligns the loan with commercial lending standards.

 

4. formality matters: crafting the perfect loan agreement

While it may seem easier to ‘do it yourself’, a formal written loan agreement is always recommended. This document outlines the terms clearly and can prevent misunderstandings and disputes. When creating a loan agreement, think about the loan amount, security, interest rate and repayment terms. These details are not just formalities; they’re the backbone of a solid agreement.

Both the lender [you, the parent] and the borrower [your child] should get independent legal advice. This ensures that everyone understands their rights and responsibilities, adding a layer of formality and security to the transaction.

Yes, it’s an extra step, but it’s a step that can save families from future financial and emotional turmoil.

 

summing up

The ‘Bank of Mum and Dad’ is more than just a term; it’s a significant financial institution in many families. So the need for formal loan agreements is not just a legal formality but a crucial component of financial planning. Whether for estate planning, family law, or asset protection, these agreements ensure that your financial support is managed exactly as you intended.

 

we’re here to help you!

If you’re looking for guidance on the role a formal loan agreement plays for your family’s financial security, contact our legal team at legal@businessdepot.com.au or give us a buzz on 1300BDEPOT to discuss further.

 

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General advice disclaimer 
The information provided in this article is a brief overview of the subject matter and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however, information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision and should consult an appropriate professional before making any decision.