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Legal tipe 12: Parents Helping Adult Children

Discussion in 'Legal Issues' started by Terry_w, 30th Jun, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Parents Helping Adult Children


    Many parents want to help their (adult) children financially. The common way they do this is to just either hand over a large sum of cash (or bank transfer).


    There are 3 main issues to consider before doing this:

    1. Bankruptcy of either parent or child

    2. death of either

    3. divorce/separation of the child

    If the child ends up bankrupt the parent then argues that the money they transferred was really a loan. But there is no evidence of an agreement. There is also no security taken, so if the parent did lend the money to the child at best they would be an unsecured creditor.

    Of course if the parent were to go bankrupt it would have been better that the money was a gift. In this case planning which parent lends or gifts can be important - perhaps the parent least at risk would be the better choice.


    If the parent dies other family members may argue that the transaction was a loan. the executor may need to sue the child to recover the money so it can be passed via the will. If the child dies then the parent’s money may go via the child’s will to others - perhaps the spouse who could then remarry. You want some control. You also want to avoid costly legal fees if there is a legal argument of gift v loan.


    Often when the child’s relationship breaks down the parents will claim the money was a loan and try to recover it. This is to reduce the chances of the money ending up with the spouse in the property settlement. Naturally the family courts are suspicious of these sudden ‘loans’ unless there is evidence.


    Solution - decide before transferring if the transaction is a loan or a gift and document it either way. If it is a loan consider taking security - a second mortgage for example. You will then be a secured creditor.
     
    willair, PrG and JPS25 like this.
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry - spelt tip wrong in header and cannot change it.
     
  3. SonOfTrigger

    SonOfTrigger Well-Known Member

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    Hi Terry - would the security need to be registered/perfected under PPSA to stand firm? As in would just having a mortgage document in a box be superceded by any registered claims?
     
  4. Beelzebub

    Beelzebub Well-Known Member

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    Could you set up evidence of a loan without the expectation of the child ever re-paying the loan? Say, taking security on the loan in the form of a mortgage with the loan to be paid back with interest only if the house is sold?

    This way, as a parent, you could get your initial gift back from your child if the relationship breaks down and they are forced to sell. You would also get an additional portion of the equity in the property as interest on the gift/loan?

    Then, when the money is paid back and your child wants to re-purchase the property you could just make a new loan with similar conditions.

    Would this work? Or would the courts see though it?

    Beelzebub
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Registration would give priority. A non registered mortgage is an 'equitable mortgage' and still gives some protection, but a later registered mortgage or other interest would take priority.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it could work. But under the limitations act (state legislation) the contract or deed would be unenforceable after 6 to 12 years.

    You could always keep entering new agreements each year.
    make sure you also cover off in the wills otherwise an executor would be asking for the money back.
     
  7. JPS25

    JPS25 Member

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    Great info Terry thanks might need it one day soon
     
  8. Big Daddy

    Big Daddy Well-Known Member

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    Is it a good idea to have the spouse as a party to the agreement (witnessed by JP or lawyer)?

    Is it equally as strong for the parent to take a caveat over the property instead of taking a second mortgage?

    Also will this have implications such as a lack of equity growth for the child?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends on the circumstances. Generally for the lender the more people and more security they can tie up the better. Might be a good idea to bring the spouse in on the agreement to make them jointly and severally liable.