How will a monetary gift to your child affect your estate planning?
Parents are always looking for ways to assist their children, whether it be for house deposits, education or other life expenses, but have you thought about how this will affect your current estate planning, such as the gifts you have left in your will? Particularly if you have more than one child.
Are you happy for such a monetary gift given to your child (who is married or in a de facto relationship) to also benefit their partner if they were to split up?
These are important questions to consider.
Providing money to your children might seem like an innocent thing to do, but it can lead to some serious legal issues which you may not have intended.
Below we look at why gifts to children should be documented as a loan.
A scenario we often come across is where mum and dad give their daughter Sally $350,000 to buy a unit. Life is going really well for Sally and she meets Barry. Barry moves in with Sally and for the next 10 years of their life, everything is bliss.
Unfortunately, Sally and Barry separate. The housing market has not increased by much and the unit is still worth $350,000. It is the main asset of their relationship and in the circumstances, Barry may be entitled to $175,000 (pursuant to Family Court orders).
It does not matter that the money was a gift from Sally’s parents to her.
However, this outcome would have been substantially different if when Sally’s parents gave her the money, they entered into a loan agreement with Sally. Had a legally binding loan agreement been entered between Sally and her parents, then Barry would only be entitled to half of the assets of the relationship (which exclude the $350,000 due to the loan agreement to Sally’s parents).
Accordingly, instead of Sally only ending up with half of what her parents had worked very hard for, the money is back in her parents’ hands, to be utilised for their family.
As you can see simply ‘giving away’ money may carry some significant risks.
It is extremely important to protect your hard-earned money in the event of (almost always unexpected) bankruptcy, divorce, your children suffering from a drug addiction or mental condition, or even if they just stop loving you, but most importantly if you run out of money yourself in your old age.
Loan agreements do not have to be lengthy or complicated but are essential to not only protect your hard-earned money, but also benefit your child. Further, a loan agreement may save you hefty legal costs if your child refuses to re-pay the amount because they say it was given to them as a gift.
You can always decide in the future to forgive the loan while you are alive or, alternatively, in your will.
So, when making loans to your children, talk with all your children together about the loans and think about not gifting children money – but lending them money. This protects both you and them.
If you are considering assisting your children with financial assistance, contact us and we will be happy to assist you with any questions you may have.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email firstname.lastname@example.org.