Over recent decades, many Australian families have relied on getting money from the “Bank of Mum and Dad” to help with home purchases.
But this latest research shows there are growing legal risks from that trend.
Researchers spoke to 80 older parents and adult children. Most were from Sydney and had either given or received family money to help with buying a home. Typically, people in this study had provided or received an average of $75,000, though in one case it was $500,000.
They found both the parents and adult children in the study were often unclear whether the money was a gift or loan. Surprisingly few had even written down anything to make that clear.
That lack of clarity and communication has the potential to cause bitter family rifts, elder financial abuse and costly legal battles in the Family Court.
If you’re applying for a home loan, many banks require written proof that funds from the “Bank of Mum and Dad” are genuinely a gift – meaning nothing is expected in return.
This is because a parental loan that needs repayments reduces how much the home buyer can actually afford to borrow from the bank.
In the study, some participants were asked to sign gift letters for their children to meet the bank’s requirements, even when they viewed the money as a loan. Henry, aged 60, described this scenario:
At the time we had to tell the bank that it was a gift. But in hindsight we said to [our son], ‘One day we’d like to see some of that come back to us’. Because it was $50,000 and it’s a lot of money to just give away.
Gifts provided to children by their parents have a specific status under Australian law, known as “presumption of advancement”. In the absence of proof, this means funds transferred from a parent to a child, regardless of their age, are most likely to be seen as a gift.
In practice, this puts the burden of proof on parents if they expect any future repayment.
Giving or receiving money can also affect Centrelink payments, so always check that first.
A loan requires repayment of funds under certain terms and conditions. Typically, a loan involves an agreement (verbal or written) between parties. This includes repayment terms, whether interest applies, and a repayment schedule.
Written loans may be informal or formal.
The distinction between gifts and loans may appear relatively clear-cut. But in practice, this is rarely the case.
In this study, they found the relationship between gifts and loans often got blurred. For instance, loans often turned into gifts over time when repayments stopped being made or requested.
In several cases, parents they spoke to effectively “wrote off” loans (meaning they stopped expecting payments) when their adult children experienced financial hardship, a job loss or became parents.
In many cases, they found the parent and adult child had different understandings of whether the money transferred was a gift or loan.
For instance, Oliver, aged 60, helped his daughter Gianna, 34, with a deposit for a house, saying:
It’s more a gift. I don’t expect to see any of it back, but I made it clear to her that she had to use it to buy a property.
However, when Gianna was asked about the deposit money, she said:
That’s a good question. There’s not really any terms on it – no interest or any of that. But I’m going to repay it back. I think that’s what they’re expecting of it.
While conducting this research, they were struck by the lack of communication between family members.
Differing understandings of the funds being a gift or a loan typically resulted from unspoken assumptions.
Most of the participants were reluctant to speak about money, even with close family members. They often felt their arrangements were private family matters that did not need to be discussed with outside parties.
As a result, none of the 80 participants in the study sought professional legal or financial advice.
Very few had documented their agreement in any way, with the majority of money transfers remaining purely verbal.
To help avoid misunderstandings and potential family conflict in the future, it is important to have clear and open discussions about:
Having these conversations early and seeking professional financial and legal guidance before transferring money can help ensure everyone is on the same page and reduce the risk of hurdles later on.
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General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
Source: This article is republished from The Conversation
