The Brief for Accountants & Financial Planners
February, 2018

Advances to children - family law & estate planning issues

Two minute scenarios...

Many clients advance money to children to help buy a property. However, there are a couple of family law and estate planning issues to consider.

Scenario One... Tim and the house deposit "gift"

Scenario: Tim's parents, Michael and Sue, gave him $200K towards a home deposit.

What's the issue? Mike and Sue have two other children. If they leave their Wills as they are, with an equal split to all children, Tim will have received more than the others.

Solution: If Mike and Sue want the $200K to be considered a "pre-inheritance payment" they need to note the gift in their Wills so that the other children receive more from the estate than Tim such that it is equalised. Some clients also want that sum to be adjusted for CPI so that the true value is reflected at the date of death.

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Scenario Two... Tim and the house deposit "loan"

Scenario: Mike and Sue loaned $200K to Tim for a home deposit but are a bit concerned about Tim's relationship and what will happen to their money in a family law settlement.

What's the issue? Without a loan agreement documenting the terms and conditions of the loan, including interest payable, repayment terms etc., there is a risk that the Family Law Court could treat the payment to Tim as a gift.

Solution: Mike and Sue should have a loan agreement drawn up. They should also ensure they cover this in their Wills so that if, for example, the loan does not need to be repaid on death, the other two children will receive additional money to equalise it.

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Scenario Three... but is it enough?

Scenario: Mike and Sue had a loan agreement drawn up. Tim's relationship has broken down and he is in the middle of a Family Law settlement.

What's the issue? Although there was a loan agreement, Tim hadn't been paying interest or making any capital repayments. The Family Law Court will look to the commerciality of the agreement and may still conclude the $200K was a gift and be treated as part of Tim's assets.

Solution:  To help ensure this loan is treated as such by the Family law Court, a loan agreement is recommended and interest paid or capital repayments made. Securing the loan with a mortgage would also provide further evidence of the loan’s commerciality and further, would assist if Mike and Sue are concerned about Tim being bankrupted.

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More information for clients

Please feel free to forward this insight on Different Types of Wills to your clients. Or if they would like to discuss how we can help them please call 03 8621 9000 or email info@irongrouplawyers.com with their details and we will contact them, obligation free.

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