Basic Rules for Documenting Family Loan Agreements

Basic Rules for Documenting Family Loan Agreements

The most stressful conversations in family relationships usually involve questions about money — gifts, loans (and everything in between).

Money and wealth are resources to be managed so they can continue to be the most effective.

Documenting a family loan agreement:

  • protects both the lender's interests and the borrower's future
  • provides a safety net in case something totally unexpected happens in the future and the funds originally meant as a blessing, become a liability in someone's life

In the future you can then cancel (forgive) the loan agreement while you are alive, or in your Will.

Rule #1 – Understand the 5 Future risks everyone faces

  1. Relationship breakdown, divorce (and court-ordered financial settlements).
  2. Personal Bankruptcy is increasingly common.
  3. Addictions - gambling, drugs and high-risk speculative spending and investing, happen.
  4. Medical risks, mental health, future motor vehicle accidents affect relationships.
  5. Litigation and Personal Injury Lawyers who like to chase easy targets, middle-aged folk with assets.

Rule #2 – Never ‘give’ your children large amounts of money

Always ‘lend’ them money ‘payable on demand’ and never rely on verbal agreements. Documented loans to children mean their creditors and estranged spouses have less money to claim as loans must be repaid before the remaining assets can be legally divided.

Rule #3 – Never ‘gift’ money to a spouse in a high-risk occupation

Do not ‘gift’ money to the at-risk partner in a relationship. Instead, low-risk partners lend the high-risk partner the money. This is via a legally enforceable Family Loan Agreement between spouses. 

Rule #4 – Never ‘gift’ a home deposit without a Family Loan Agreement

Loans to children mean creditors and estranged spouses have less money to claim against as loans must first be repaid before a claim on remaining assets can be made.

Rule #6 – Recognise potential risks and predators

The ATO (forces more small businesses into bankruptcy than any other creditor).

  • One child may lend parents funds for an Aged Care Accommodation Bond (a significant amount of money) that's later at risk from other siblings who wish to enforce a Will without recognising their parent's outstanding debt to one sibling.
  • It has been known, some spouses very aware of future coming inheritances may remain in a relationship solely to access a favourable Family Law Court settlement.
  • It has been known, some adult children knowingly or carelessly (sometimes ruthlessly) begin to take advantage of frail aged older people requesting ‘gifts’ of money or ‘an advance on an expected inheritance.

A word on New Relationships:

Documenting Loans to Family members is more a precaution than an expectation.

They are particularly important when money is transferred to a new family member through new relationships and you chose to safeguard a 'gift' for a particular period of time, before following up with a Deed of Debt Forgiveness. 

grandmother cooking with teen granddaughter who is still eating cookies

What is a Family Loan Agreement document?

The most stressful conversations in family relationships usually involve questions about money — gifts, loans (and everything in between). A Family Loan Agreement is a legal document designed to protect everyone's interests, the giver and the receiver.

Simply put, a documented family loan agreement records the reasons and expectations for any sizable loan made between family members, and a legal method of retrieving the funds if something unexpected occurs in the future, that puts those funds at risk.

The main issue is not just getting a key legal document in place, but understanding your generosity and decisions can be 'gift wrapped in a protective legal wrapping', to keep everyone safe (and help adult children become financially independent).

Why documenting loans between family members keeps the peace

A Family Loan Agreement protects your generosity and decisions made today, against the unexpected risks of tomorrow. Transferring money to family members through gifts or other means has the potential for good (and not-so-good outcomes later).

  • Whether these are sizable deposits for a first home, perhaps a payment to clear tertiary education debts, payment for weddings or assisting frail age parents with financing an Aged Care Accommodation Bonds - can all be legally documented to protect your good intentions, plans, and generosity, so later, if others do not remember the reason for your generosity and decisions, they can be clear.

While many of us would prefer not to face the complications of real-world money complications and changes in relationships, nothing says genuine like putting it in writing.

Pro Tip: Read our Case Study – Alma and what happened when she 'gifted' a deposit for her grandson's new home, and partner

Who is a Family Loan Agreement for?

Used for Singles and Families alike, a documented Family Loan Agreement has a number if very important advantages. More a precaution, not a plan, a family loan agreement, is a way of thinking clearly about uncertain futures and managing resources so that the best possible outcome has the best possible chance.

Family loan agreements are designed to cover all types of loans between family members. Whether that's documenting a loan to;

  • an adult child,
  • between step-family members in blending families,
  • siblings in relationships with uncertain futures,
  • family members in business and high litigation occupations like medical and engineering,
  • or maybe a loan to mum or dad for aged care costs, or perhaps just siblings loaning each other substantial amounts like a deposit o a home or a business loan — all these decisions can be made better when you consider how to prepare for lifes possible and unexpected risks

Family Loan agreements provide a stable and predictable 'wrapping' around a good intention.

What do family Loan Agreements protect against?

The 5 main risks that everyone faces in an unknown future are:

  1. Relationship breakdown is a real-life risk and financial risk.
  2. Bankruptcy is happening more.
  3. Addictions - gambling, drugs, and high-risk speculative spending and investing, happen.
  4. Medical risks, mental health, and accidents affect relationships.
  5. Litigation and Personal Injury Lawyers who like to chase easy targets, middle-aged folk with assets.

Documenting Loans Made to Family members

Whether that's helping out mum and dad financially or lending money to a sibling experiencing a relationship breakdown (as possibly facing a family law court financial settlement in the future), lending money for a home deposit – documenting your clear intentions now ahead of time will lessen the chance of misunderstanding or lapsing memories later.

Good hearts and bad ideas

There are some things most people seem to immediately understand and recognise as a bad idea:

  • Giving a large amount of money to someone experiencing an addiction to gambling or drugs - is not a good idea.
  • Giving a young child unrestrained access to a cash inheritance immediately - is not a good idea.
  • Helping a friend with money with no consideration if there is an underlying and ongoing problem - is not a good idea.
  • Receiving a large inheritance while they’re part way through a divorce proceeding in the Family Court and still dividing financial assets - is not a good idea.

Protecting your good intentions and document your reasons

Tomorrow is hard to see, (and often darn right impossible) in the current circumstances - so how do we create good habits that support our good behaviours and best intentions?

We can help you build a legally drafted and documented Family Loan Agreement through our secure customer portal.

How we can help

Family Loan Agreements are an important part of protecting your money provided to others from unseen future risks.

  • We can supply this legal document.

Contact us for a confidential chat about your needs.


Related: Key Legal Documents for Business Owners


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