21 Feb 3 Considerations When Helping Children Purchase Property
It seems that the only way a lot of younger Australians can get into the property market is by hitting mum and dad up for a loan – sound familiar? Interestingly there are a raft of estate planning matters that you might like to consider and our friends at Iron Group lawyers have put together 3 considerations and scenarios for you if you’re thinking of, or have, loaned your children money to buy a property.
Scenario One… Tim and the house deposit “gift”
Scenario: Tim’s parents, Michael and Sue, gave him $200K towards a home deposit.
What’s the issue? Mike and Sue have two other children. If they leave their Wills as they are, with an equal split to all children, Tim will have received more than the others.
Solution: If Mike and Sue want the $200K to be considered a “pre-inheritance payment” they need to note the gift in their Wills so that the other children receive more from the estate than Tim such that it is equalised. Some clients also want that sum to be adjusted for CPI so that the true value is reflected at the date of death.
Scenario Two… Tim and the house deposit “loan”
Scenario: Mike and Sue loaned $200K to Tim for a home deposit but are a bit concerned about Tim’s relationship and what will happen to their money in a family law settlement.
What’s the issue? Without a loan agreement documenting the terms and conditions of the loan, including interest payable, repayment terms etc., there is a risk that the Family Law Court could treat the payment to Tim as a gift.
Solution: Mike and Sue should have a loan agreement drawn up. They should also ensure they cover this in their Wills so that if, for example, the loan does not need to be repaid on death, the other two children will receive additional money to equalise it.
Scenario Three… but is it enough?
Scenario: Mike and Sue had a loan agreement drawn up. Tim’s relationship has broken down and he is in the middle of a Family Law settlement.
What’s the issue? Although there was a loan agreement, Tim hadn’t been paying interest or making any capital repayments. The Family Law Court will look to the commerciality of the agreement and may still conclude the $200K was a gift and be treated as part of Tim’s assets.
Solution: To help ensure this loan is treated as such by the Family law Court, a loan agreement is recommended and interest paid or capital repayments made. Securing the loan with a mortgage would also provide further evidence of the loan’s commerciality and further, would assist if Mike and Sue are concerned about Tim being bankrupted.
If you want advice on how to best loan or gift money to your children for the purposes of a deposit or loan for a property and are not sure how to proceed please call us on 02 9633 5530 and we can set up an appointment with one of our Estate Planning specialist solicitors to ensure there are no issues.