Posted on August 24, 2023
With the rise of interest rates, cost of living and the removal of the low and middle income tax offset, parents are increasingly gifting money or property to their children or other family members.
This is a kind gesture by parents to their children, however, very few parents are aware of potential adverse consequences of ‘gifting’ rather than ‘loaning’ money, these include:
- a trustee in bankruptcy can access the money if the child enters bankruptcy;
- no protection for vulnerable beneficiaries (i.e., if the child has drug, alcohol or gambling problems);
- the funds can be subject to family law property division; and
- disputes can arise regarding whether the funds were a gift or loan once the parent has passed away or even in the course of a family law matter.
Below is a case study that will examine different types of deeds and their purposes:
Walter is recently married and is about to purchase a home with his new wife, Eva. Walter’s parents, Narelle and Owen, provided the sum of $30,000 to Walter and Eva towards their wedding and have agreed to provide further sums totaling $750,000 to assist the newlyweds in purchasing a home.
Walter and Eva divorce after 7 years of marriage.
Deed of Gift
A Deed of Gift is a legal document that can be prepared when one party makes a gift of money or an asset to another party without imposing conditions on the gift.
Preparing a Deed of Gift relinquishes any ambiguity as to the nature of the gift, i.e., one party cannot later argue that the funds or assets were a loan or were conditional gifts.
If Narelle and Owen had entered into a Deed of Gift with Walter and Eva, they would be acknowledging that if Walter and Eva were to separate, the funds would be taken into consideration as a gift in their family law property division.
Narelle and Owen would be foregoing their rights to reclaim the funds from Walter and Eva.
Deed of Loan
The difference between a Deed of Gift and a Deed of Loan is that the funds become due and payable to the parents on demand via a Deed of Loan.
After 7 years of marriage the family home that Walter and Eva purchased is now worth $1 million. If Narelle and Owen entered into a Deed of Loan with Walter and Eva every time they lent the couple money, then Narelle and Owen are entitled to the return of their $750,000 plus $30,000 for the wedding on demand. Narelle and Owen could then re-lend the funds as they see fit.
Additionally, the parents have the testamentary freedom to either forgive or make the loans due and payable upon their death.
If you are considering providing money or assets to your children and are unsure about whether you should implement a deed, we recommend that you contact our team at Scanlan Carroll Lawyers before providing any funds to a family member to ensure that you are protecting your interests.
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