A loan to your children - a generous gift or a future rift

Parents have long considered lending money to their children to help them financially. However, if the children do not repay the loan, the consequences may be far-reaching.

If a loan agreement is in writing and the child cannot repay it, the parent, (known as the lender) can enforce repayment of the debt in a civil court proceeding. This is a costly exercise depending on the loan amount and the terms of the loan.

But what happens if the loan agreement was made verbally or with a handshake? The majority of these cases result in the payment being presumed to be a “gift” or an “advancement” rather than a loan. If a parent does agree to a loan without any formal agreement, they should also be prepared to part with that money permanently. It is highly recommended that all loan agreements are written and formally executed.

Some key considerations when drawing up a loan include the terms, loan amount, any interest payable, consequences of default and the timeframe of repayment. Other key factors that will help establish a loan include any records of the debt, such as dates and times of any conversations, any previous payments, or admissions and acknowledgements of the debt.

Many disputes arise over the actual terms of the loan, therefore clarifying these points will assist.

Lenders must also be aware of Legislation in all states which limits the time in which legal actions can be commenced to collect debts. In most states, this limitation is 6 years from the date the loan agreement was made. There are circumstances where this period is extended, for example where there is a secured mortgage over a property or where there has been a court order imposing terms on which the debt is to be repaid.  It is important to have a date of repayment which cannot be extinguished by the legislation such as the date of death of the lender. A loan agreement can have any terms to which the two parties agree. This includes a longer time to repay the loan.

Obviously, loans to children and the terms of repayment can have long term effects on relationships and, the damage may extend to family dynamics. A keyconsideration in making loans to children or taking action to recover such loans is whether such action would result in permanently destroying theirrelationship. Weighing up the possibility of losing a child against the desire to have the loan repaid should be seriously contemplated

If you would like to discuss this or any other issues, the Family Law team will be happy to assist on 9870 9870.

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