The Dangers of “Parking” Parents Cash in Your Offset There are parents out there with large sums of cash. Children are often tempted to ask if they could store this cash in their (the children’s) loan offset account to save interest. It could be a great idea, but there are various issues to consider. Example. Tom has a $500,000 home loan on his owner occupied loan paying 5% interest. Dad has $500,000 cash sitting in a savings account paying 3% interest. If Tom ‘takes’ dad’s money and pays him 4% pa Tom will be saving money and dad will be making more money. Sounds good doesn’t it. However multiple issues need to be considered 1. Is it a loan or a gift? Dad dies, Tom argues that it was a gift, Tom’s sister argues that it was a loan. There is no documentation to prove either. Tip - get a loan agreement 2. Death of dad If dad dies the executor will need to call in the loan so the money can be distirbuted to the beneficiaries under dad’s will. This should not be a problem usually, but if Tom had gambled it away it could be. 3. Death of Son If Tom dies the dad will need to deal with a third party to try to get the money back. He doesn’t want to leave it to form part of Tom’s estate as it will go to his new defacto. This is where the loan agreement is vital 4. Bankruptcy of Tom Dad doesn’t realise it but Tom is a developer and developing is risky. Tom goes bankrupt and the trustee in bankruptcy takes the $500,000 and pays to creditos. Dad sends across the loan agreement thinking this will save him. But this only makes dad a creditor. An unsecured creditor. Dad still loses his money. If dad had taken a mortgage he would be been much more protected. 5. Bankruptcy of Dad Probably less of a risk, but Tom would have to give dad back the borrowed money so it could go to creditors. When this type of thing happens Tom and Dad will often argue it wasn’t a loan but a gift - gifts over 5 years ago will be hard to attack. 6. Incapacity of Son Tom has an accident and loses capacity. Dad now has to deal with Tom’s defacto who Tom appointed under an enduring power of attorney. Dad hates her as he thinks she is a gold digger. Legally she is making decisions for Tom. Lucky dad had that loan agreement drawn up. 7. Incapacity of Dad Dad is now senile and Tom has to deal with a public trustee company who are dad’s attorney. A third party - this is where the loan agreement is vital. Or Tom may end up being the Attorney. He has to act in 2 roles - borrower and attorney for the lender. Tom has to be extra careful that he does not breach his duties to his dad and that others don’t think he has. Any ePOA document should ideally cover the loan. Allegations of abuse are possible. 8. Divorce of Son Where a loan is not documented the Family Courts are skeptical of the truth of the transactions. Often some a child gets divorced the parents will claim that any money that was gifted to the child was actually a loan to them both. Best to get the agreement drawn up from the beginning so that the parents money has less chance of falling into the hands of a gold digging spouse. 9. Divorce of Dad Probably not such an issue if Dad is married to Mum, but if Dad is married to someone else then Dad’s transfer to the son may want to be a gift rather than a loan. 10. Limitations Act Loans can become unenforceable if they go for too long without any transactions happening. It could be 6 or 12 years depending on the set up. This is important to remember as if one party dies the executor or Administrator will stand in the shoes of the deceased and they have a legal duty to call in all loans that are outstanding and/or to oppose repaying loans that do not to be paid. They will be personally liable and they will possibly be a stranger so they won't’ care about verbal agreements but only legally enforceable agreements. These are just some of the issues to consider.