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Gifts, Loans and Debt Forgiveness (and the Wisdom to know the difference)

In our busy financial world, generosity can have consequences you may not be initially aware of.

'When,' is usually the first question a generous person asks. The next questions, often missed in the excitement should be, ‘how to protect the gift; should I make it a loan', and ultimately, 'when and how could I cancel (the legal term is forgive) a loan at a time in the future?'

Read in this article

Why people use a Deed of Debt Forgiveness document

Financial impact of generosity

In our dual income preferred world, getting ahead financially continues to be a constant challenge for any family. For those of us who have people in our lives who occasionally help us out financially, they are a luxury to be appreciated and never an entitlement to be expected.

Protecting the impact of generosity

Generosity of course is a relative concept, a quality that's a lot like unselfishness, that will depend upon one's age, financial position and our personal current financial needs and capacity.

While being able to use your financial position for the betterment of another is a generous action, when we’re talking about a using a formal Deed of Debt Forgiveness document, we’re usually talking about financial generosity in excess of ten thousand dollars - and provisions of loans, gifts and financial assistance that usually create a ‘structural change’ in the life of the recipient.

Unintended consequences of random generosity

We all want our generosity to be a blessing and not a curse, so better understanding the context of our financial world and how gifts and loans are viewed, can help us all make a more informed and impactful decision.

  1. Direct significant gifts made to adult children can mean the gift goes unprotected and remains constantly exposed to a potential future family court or bankruptcy trustee challenge.
  2. Loans made to adult children to help with a deposit for a home loan can be later seen and assessed as additional interest bearing loans, that when assessed, reduce an individual's loan serviceability capacity, and may even prevent them qualifying for a home loan.
  3. Loans and Gifts are of interest to Centrelink. Centrelink has a set of ‘deprivation rules’ that impose a maximum gifting cap on generosity, before they take action and penalise a gifter and their future Centrelink entitlements. This has consequences for loans and gifts that are made within 5 years before a person retires.

Centrelink Deprivation Rules:

People can gift up to $10,000 per financial year and $30,000 over any rolling five financial year period, without Centrelink Deprivation Rules applying. These thresholds apply to singles and couples combined (i.e. not per person in relation to couples). If the total value of your gifts is more than the value of the gifting free cap, your payment may be affected.

Gifting is said to include where the person

  • gives an asset to another individual
  • forgoes their interest in a deceased estate
  • transfers assets to or resigns from involvement in a trust
  • donates money
  • sells an asset for less than market value
  • is guarantor on a loan where the borrower defaults, a loan repayment is made and no legal steps are taken to recoup, and
  • purchases a home with children or other family members and receives a disproportionate legal interest in the home compared to the amount paid.

Using a Deed of Debt Forgiveness document

A legally drafted Deed of Debt Forgiveness is a binding document that outlines the agreement between a creditor and a debtor to forgive (or release) a debt owed by the debtor.

The Deed document formalises the process of forgiving a debt;

  1. This means the debtor is no longer obligated to repay the amount owed
  2. The creditor decides to waive the debt for ‘natural love and affection’, and
  3. There is no money changing hands

When would you use a Deed of Debt Forgiveness?

The creditor is just ‘good-hearted,’ and

  • It may be that you've provided an amount of money to an adult child to help them with it a deposit for a home but after 7 years you now wish to ‘relieve them from the debt’
  • It may have been that you provided an amount of money to a friend to help them through a difficult financial time and now you're in a position where you want to legally release them from that debt
  • It may be that you have grandchildren who you would like to financially provide for now, rather than later and risk making a bequest in a Will Document to them that will be challenged by other people
  • It may be that you're hoping to retire in 5 years, maximise your financial position and qualify for the age pension

Protecting your Good Intentions

In our blog article, Family Loan Agreements - a Precaution not a Plan we talk about practical responsibility in generosity and how to use formal family loan agreement documents, Investment Bonds and other more structured approaches to protect your generosity.

The intention is not to reduce a persons generosity but to simply document and

  • Protect the Provider
  • Protect the Receiver, and then
  • Protect the Gift

from potential long-term relationship failures, litigation or bankruptcy and related.

The importance of documenting our decisions about your generosity

What’s the difference between a Deed of Debt Forgiveness and a Deed of Gift?

When giving a particular gift to a person it’s prudent to also provide a legally drafted deed of gift document to accompany it.

A legally drafted Deed of Gift is a legal document used to formally transfer legal ownership of property or assets from one party (the donor) to another (the recipient) without any exchange of money or consideration.

  • When you have decided to give property, valuable items, money, and other assets to another, a Deed of Gift makes it absolutely legally clear the details of the gift, including a description of the gifted property, the identities of the parties and the intention of the donor to transfer ownership without anything in return
  • A Deed of Gift document helps make certain the donors intentions and the recipients obligations clear. This is particularly important when they may be part of a large or multi-generational family, when the gift provider is frail aged, or facing developing health changes, to provide certainty to all parties

Both the legally drafted Deed of Debt Forgiveness and the Deed of Gift, formally recognize your generosity and kindness as you're legally giving a benefit to a person at no cost with no payment attached.

When to create a Deed of Debt Forgiveness document?

  • A Deed of Debt Forgiveness can be drawn up at any time and when signed and executed by the party's concerned, it formalises the forgiveness of a debt from a specific date.
  • A Deed of Debt Forgiveness can also be structured into a givers Will Document so that upon their future passing, a specified debt to a specified person can also be automatically forgiven, so as not to unbalance any additional financial provisions or entitlements that may have been made to the beneficiaries in a person's Will Document.

Sapience clients are able to have their executed Deed of Debt Forgiveness documents scan to our secure cloud storage, or stored with Secured Will Documents for life.

Protecting everyone

Whether you are a person who has lent money to another or whether you are the recipient of another person's generosity, understanding the importance of A Deed of Debt Forgiveness is an important part of managing that debt, while it remains an obligation, and when you become released from it legally.

As a donor, regardless of the motivations for your generosity, it's important you understand the legal consequences of having a debt owed to you and or the impact of gifting money to another, that can occur (especially if you're within 5 years before you seek to apply for government services).

Sapience Financial can help you set up a Deed of Debt Forgiveness and a Deed of Gift document, when you're ready.


author pic drew browneDrew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.

Written by Human Not made by AI sapience financial

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