Warwick Gilbertson: Are you the local branch of the bank of Mum and Dad?
I’m Warwick Gilbertson. I’m one of the solicitors with Turnbull Hill Lawyers. Today I want to take you through three aspects of being a lender as a parent to your children. In essence, I want to talk to you about what you would as a banker do with due diligence.
Lending to your children
Your children come to you, and one of your children says, “Mum, Dad, I need help. Can you help me in buying my home?” You being the kind parent that you are, say, “Sure. What do you need?”
It’s a simple thing and it happens repeatedly, but it creates issues at the time you lend the money and going forward later on. If you lend funds to your children, under what terms do you lend them? Is it very clear whether it’s a gift or whether you’re actually saying to them, “I will lend you, say $200,000 but the terms are, I need interest paid.” At what rate? Or, “I need you to pay within a defined period of time.” Do your children understand those terms? Are they aware of it?
In those circumstances, it’s important that you document it, and what is to be the security for your loan? Are you trusting your children’s word? Do you honestly and realistically see that they have the capacity to honour the deal that they have with you? Because if they don’t, then you are the person who is at risk. How will you recover that money if it has been a loan? How will you prove it is a loan? How will you prove what the terms are? That is the reason why I say it’s important that you document it, and if you need to, that you secure it at the very least with a loan agreement, or preferably, if you are able to, secure it by a way of mortgage so it has a commercial character.
Why a commercial character? Because in our day and age, we know that our children go through their own difficulties of life. So your child in five years time, after you’ve lent them the money, goes through a marriage breakdown.
Is the money that you provided, a gift to them? A gift to both of them? A loan to just your child? A loan to both of them? What are the terms of it? What will a court in considering your children’s financial circumstances say is the arrangement they have with you? Do your due diligence as the bank of Mum and Dad?
Being a guarantor for your children
The second issue I want to talk to you about is, say you don’t lend the money, but your children say to you, “I don’t have sufficient collateral to borrow, but the bank say that if you go as my guarantor, they will lend me the money to buy my house.” Will you? You, being the kind parent that you are, say, “Sure. We will.”
Be aware that when you sign the guarantor document, you are being liable for that debt, and you need to face the reality that at some stage that is a debt that you may be called on to pay. In addition, say you may be doing your own form of development and acquiring assets over the years. Are you aware that when you go to your bank to borrow, to buy, say your investment property, that the financial institution will not take just into account your immediate finances, but also the existence of this guarantee as a loan, and it will lessen your capacity to borrow?
Be realistic. Think about what you’re signing, and if the bank asks for your deeds, are you really just the guarantor, or are you also one of the borrowers with your property as security? Be alert.
Finally, the third matter I’d like to draw to your attention is, as the diligent parent, you’ve already thought about your estate planning and doing a will, and you’ve made a will treating your children equally, and yet, one of those children you’ve lent the $200,000 to.
What is to occur on your death if that debt is still in existence? Is it to be forgiven? Is it to be paid back to the estate and under what terms? If it’s to be forgiven, do you really understand that that means your will is not treating your children equally? There needs to be an adjustment because you have made a further provision for one child during their life.
The situation is, when you are the bank of Mum and Dad, when your child comes to you, you do need to do your due diligence. You need to think about how will I get my money back when I need it? What will happen if something happens to my child such that I have an arrangement which is legally enforceable? What should I do in regard to protecting my own assets going forward, if I’m a guarantor, and does it mean that I’m content to treat one child differently to my others?
As you can see, with these issues in your mind, it would be important for you to seek assistance from a legal adviser who can take you through the various aspects and point out to you how that will affect you and how to protect yourself and your child.
If that is of interest to you, if it is a concern to you, come and see us at Turnbull Hill. We deal with these issues day by day. We can point out and guide you through how best to deal with the situation.