Gift or lend to your child?

Deciding how to help your child/ren with money warrants an exploration of two very different ways to provide them financial assistance. You might choose to gift them money OR you might prefer to enter into a loan agreement with them. Your options will depend upon your own personal financial circumstances at the time of the request for help. What will you do?

First, consider whether you can afford to give money to your child and not see it returned to you. This is a gift. A gift of money to an adult child is generous, requiring no repayment by your child but no financial benefit to you, the giver.

Now, let’s consider you lend an amount of money to your child, setting up a ‘payable on demand’ loan agreement. This loan of money can protect your financial future by ensuring that you may recall the loan at any time or at a time agreed, or you can forgive the loan at a later date, even include it in your Will.

Lending is preferential to gifting – Why?

Imagine your gift $100,000 to your child for the purchase of a home. In the event of your child marrying and subsequently divorcing, the $100,000 gift would be lost to you as part of your child’s divorce settlement with their soon-to-be ex-spouse.

Instead, if you draw up a legally-binding loan agreement with your child and lend them $100,000 towards their property purchase, should your child and his/her future spouse divorce, then the $100,000 contribution you made could be returned to you and not considered part of the marriage assets for distribution between the divorcing couple.

Lending, instead of giving, an amount of money to your child helps protect your money from a myriad of situations whereby the money might be lost. For example, your child could divorce, go bankrupt, suffer from an ongoing medical condition that prevents them from working, or even break off their relationship with you. Furthermore, you might need the loaned money should you fall ill or require it to maintain your retirement.

Formalising a Loan to your Child

It is important that you discuss a loan with your child and that you both agree terms of the loan agreement.

Create a formal written document, using a certified professional, to ensure that the loan will be honoured by the Family Court of Australia or any other legal body as may be the case.

So long as you choose to provide the loan interest-free, there will be no tax payable or tax gain. Include the statement ‘Interest rate as advised by the Lender’ and you may be able to raise the interest rate from zero, should there be a future need to do so, such as increasing the amount owed to you in the case of your child’s divorcing (thereby reducing the amount available for distribution in any divorce settlement).

Finally, at all times, consult a certified professional about lending money to your child and formalise a loan for the sake of your child and you. Ideally, never ‘gift’ money to you child. Providing financial assistance to your child can be a loving gift when done with the best intentions as a loan.

How can YML help?

Talk to our YML Super Solutions Team today to see how YML Group can assist you with creating a loan agreement. Contact us on (02) 8383 4400 or by visiting the Contact Us page on our website.