29 Sep 2022It is not uncommon for people to give gifts or loans to family members, whether it be money or assets such as property. However, there are some important misconceptions that the lender and the borrower should both be aware of before giving, lending, borrowing or taking.
What is the difference between gifts and loans to family members?
With a gift, the ownership of the money or asset vests solely in the recipient. The gifted asset or gifted sum is not required to be repaid or returned to the giver.
A loan is an advance of money which is repayable on terms expressed or implied in the arrangement. Loan moneys are normally required to be paid back to the lender, unless an agreement has been made not to pay the money back.
How to draw up agreements for loans to family
Whether you are giving assets or money to family members, or providing loans to family members, you may wonder whether you should document such arrangements.
The answer is always yes. Even if you trust your family member absolutely, there may be some unforeseen event that comes between you and changes the circumstances completely.
For example, your family member marries or partners with someone who causes the relationship with you to break down, or one party becomes mentally ill, or loses mental capacity, and the terms of the agreement are forgotten or misconceived.
Ensuring that there is a written agreement between the two parties helps to safeguard the arrangement.
The agreement should be documented by a lawyer who specialises in the field of commercial law.
Unclear agreements about loans to family members
If a loan agreement is incorrect or unclear, or does not contain the necessary security protections required to protect the lender, then in the event of a problem in the future, the document will not suffice.
An example of where the document did not suffice occurred when a lender to a family member obtained advice from a lawyer who was not a specialist in commercial law. A simple agreement was created that essentially acknowledged the loan, but did not provide any security for the lender if the borrower did not repay the loan.
There were no file notes stored with the acknowledgment document, and so when the family member borrower did not repay the loan as per the terms of the acknowledgment, the lender had no way of recouping the money.
The borrower went bankrupt, and the lender missed out on having the money repaid to him.
It is important for the lender to be informed of their security options and to be aware that if a loan is not secured, there is high risk it will never be repaid.
Common misconceptions when giving gifts to family members
If you are giving gifts to family members, again, it is important to obtain commercial law advice and any other relevant advice before the gift is given.
There are various misconceptions relating to giving gifts to children, which include the following four common beliefs.
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“The family member recipient will not have to pay stamp duty on the transfer of land.”
Unless the parties own a farm and follow strict rules around transferring the farm by way of intergenerational transfer, any other transfer of land by way of gift without monetary consideration requires the purchaser to pay stamp duty – now known as transfer duty.
Even if you hold land as tenants in common with someone, it is not as simple as “taking your name off the title”. Taking someone’s name off a title held as tenants in common requires transfer duty to be paid by the person taking the balance of the land.
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“The family member recipient will hold the property on trust for me, until I need it again, so I can still get my pension.”
Invariably, when a parent grows older, they consider their options for financial sustainability. Often, the parents consider how they can continue receiving the pension. This might involve the thought that they need to transfer their land to their children, so that their assets appear less substantial and therefore they receive a higher pension.
This often creates problems, including unclear agreements between parent and child and possible Commonwealth fraud. It may even leave the parent in a worse position than if they had kept their land had not received the pension.
Here is an example of how a problem might arise when parents decide to transfer land to their child for no monetary consideration.
The parents see a lawyer to do the transfer. They sign a letter stating they agree to take no residual benefit of the land after the transfer. Years later, the child sells the property and the parents ask for the proceeds of the sale, saying the transfer was only on the basis that the land was held on trust for the parents.
The child says no, it was not a trust, and you signed the letter saying you agreed to take no residual benefit of the land after the transfer. The parents then claim it was a private verbal agreement made prior to the transfer, that the child would hold the land on trust for the parents.
As you can imagine, it is impossible for a court to know who is telling the truth, but the court will decide based on the evidence at hand and how the parties give evidence in the witness box.
Ultimately, if this situation arises, you have put yourself in a position where a judge must decide. He or she might not make the decision you want.
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“The family member recipient will look after me when I get older if I pay them this money now, or give them this gift now.”
This is another common misconception. Experience shows that events do not necessarily unfold in this way.
If one of the parties has a misconception about the nature of the arrangement, then it is likely that in the future, one of the parties will be aggrieved.
One option to alleviate this risk is to arrange that other documents are also created at the time of the documentation of the gift or loan, such as an Enduring Guardianship document, a Power of Attorney and potentially also a living arrangements or granny flat agreement.
This should clearly explain what the parent’s expectations are of the child when the parent grows older, and document the child’s agreement to those expectations, along with some security clauses.
What happens if the child doesn’t do those things or meet those expectations? Can the parent ask for the money back from the child to pay for a nursing home bond?
All these factors must be considered to avoid a terrible falling out in the future. You might not think that is possible, but it may not be through any fault of your own, or that of the child or family member.
Instead it could be an unforeseen life event that intervenes, such as a bankruptcy, a divorce, a new marriage, or a mental illness.
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“No one will contest the gift after I die.”
If your gift or loan is not documented, and then you die – how will the executors know what the true arrangement is?
It may be that there is a verbal agreement between a family member lender and a family member borrower, whereby money was lent and was being repaid, on the unwritten understanding that when the lender dies, the remainder of the loan is to be forgiven.
If such an agreement is not documented in a will or otherwise, then the executor will assume that the rest of the loan was to be repaid, given that there will be evidence of repayment of the money by the borrower.
Importance of seeking legal advice prior to giving gifts or loans to family
It is so important to discuss the whole of your circumstances with your lawyer. Your lawyer will need to know important information about you to advise you properly for all situations.
It may not be possible to cover every possible source of future disagreement in a document, but including a mediation or alternative dispute resolution clause in the agreement will help to avoid court proceedings and may result in a quicker resolution via negotiated settlement in the event of a dispute.
For more information please see Trouble at the bank of mum and dad – the horror story edition on family loans.
