When a loved one is in financial distress, many of us wouldn’t think twice about offering some quick cash to help out.
In fact, it’s a fairly common rite of passage in many families that parents loan their children money for any number of purchases. Research shows that one of Australia’s largest lenders, for home loans in particular, is the ‘bank of mum and dad’.
This trend is unlikely to stop any time soon. Given the current economic crisis caused by the COVID-19 pandemic, which has disproportionately affected young Australians in insecure work, many will be asking their parents and loved ones for assistance just to keep a roof over their heads.
Living expenses, such as bills and rent, still need to be paid after the JobKeeper subsidy reduces, and then ends, next year. With unemployment on the rise, many Australians will struggle.
However, loans within families can, and have, gone wrong – and can cause some pretty uncomfortable conversations later. From marriage break-ups to double dipping in an estate, the perception of a loan between family members is almost more critical than the loan itself.
To avoid this, there’s a few simple steps you can take.
Firstly, it’s highly recommended that irrespective of whether you’re lending or receiving money, to document the arrangement. If it’s a small amount, it doesn’t need to be exhaustive. An email that outlines the basic terms, such as the amount and whether the money is a gift or a loan, reduces the likelihood of miscommunication and legal dispute.
If it’s a larger sum of money, it may be better to draw up a formal loan document. This document should include the repayment terms, length of loan and any clauses that protect both sides should the debt not be repaid (more on that later).
These documents can be critical when it comes to managing family expectations in the event of a death of a family member.
Disagreements can often brew between siblings and other family members over loans, especially if someone feels that a person has already received their fair share of an estate and doesn’t deserve more. Many complex and costly disputes have hinged on this argument.
Secondly, no matter what stage of life you’re in, it’s a good idea to ensure that the loan is accounted for in your Will. This makes it clear to other families how you see the loan, which will answer some of those questions around whether a person should receive more.
You may wish to include whether the money is an advance on their inheritance, and whether repayment of the loan is required as part of estate administration. This second point can place family members in a difficult spot financially, so good legal advice will be able to cover any potential issues.
Finally, consider future family arrangements. If you lend money to your son and his partner, is there a risk that your loan will end up in their marital asset pool? If so, you may need to go to Court to get your money back.
Again, seeking legal advice on the legalities of this arrangement and how to protect your assets is recommended.
Ultimately, lending money to family members shouldn’t be complicated. A few small steps that provide clarity is all that it should take to ensure everyone involved is on the same page.
Preparing a Will or updating one is also worth considering sooner rather than later. To find out more on how to do this from the comfort of your own home, check out our MyLife Wills Online Service.