Borrowing Money and Receiving Gifts from the Bank of Mum and Dad
In recent years, the "Bank of Mum and Dad" has become an increasingly popular option for young adults seeking financial assistance. With soaring house prices, student loan debt, and the rising cost of living, many individuals turn to their parents or family members for financial support. According to Jarden economists, the Bank of Mum and Dad has injected more than $2.7 billion into the property market in the past year. With borrowers on average receiving $92,000 from their parents to assist with purchasing a home.
While this arrangement can present an appealing and generous opportunity, it's crucial to understand the legal implications involved with borrowing money from family members. In this blog post, we'll explore the key legal considerations to prevent future disputes or legal issues.
Understanding the nature of the Transaction
First and foremost, it's essential to recognise that borrowing or receiving a gift of money from the Bank of Mum and Dad is still a financial transaction, even though it involves familial ties. Therefore, it's crucial to treat it with the same level of seriousness and diligence as you would any other borrowing arrangement.
Document the Agreement
To avoid potential disputes and misunderstandings, it's advisable to formalise the arrangement through a legally binding agreement. This document should outline key terms such as the loan amount, repayment schedule, interest rate (if any), and any other relevant conditions. While it may feel uncomfortable to discuss these matters with family members, having a clear and documented agreement can protect both parties' interests.
Protect Family Relationships
Money matters can strain even the strongest family relationships. To prevent financial disagreements from causing rifts within the family, it's crucial to approach borrowing money with transparency, honesty, and open communication. Both parties should have a clear understanding of each other's expectations, financial capabilities, and limitations.
Estate Planning Considerations
In cases where significant sums of money are being transferred within the family, it's essential to consider the implications for estate planning. You need to decide whether it is a loan or a gift depending on whether you are giving your children an early inheritance. Seeking advice from a qualified Solicitor can help navigate these complex considerations and ensure that all parties' interests are protected.
Gifting considerations
If you are in a position where you can gift the money to your children, you should consider the following:
Are you gifting the money, or is it intended as an early inheritance? If you have other children who aren't receiving money yet, have you outlined this arrangement in your Will to ensure clarity after your passing?
Are you in a position to provide the same assistance to all children when they might need it? Is this documented so everyone has clear expectations?
If your child is in a relationship (married or de facto), have you considered what if the relationship breaks down? Gifts could become part of the marital asset pool. Documenting gifts as loans with conditions can mitigate this risk.
Does your child own a business? Gifts may be considered as assets in the event of a business collapse and creditor claims.
Are you in a de facto relationship or remarried? It's important to consider children from previous relationships or stepchildren to ensure fairness to all parties and prevent potential family conflicts.
Lending or gifting money from the Bank of Mum and Dad can provide much-needed financial support during challenging times. However, it's essential to approach these arrangements with caution and careful planning. By documenting the agreement, protecting family relationships, and addressing estate planning considerations, borrowers and lenders can mitigate potential risks. Ultimately, open communication, mutual trust, and respect are essential for sustaining positive family relationships during financial dealings.
If you would like to make an appointment to discuss the legal implications of any monetary gifts or loans you are planning for your family, please call us on 1300 676 267 or email us at reception@ormansolicitors.com to make an appointment with one of our experienced Solicitors.
Disclaimer: The content presented in this article is offered for informational purposes and should not be construed as legal advice or a substitute for professional guidance. If you have questions or require legal assistance, we strongly recommend consulting with a Solicitor to address your individual circumstances.