Loans can be made from parents to children, or from children to parents. Recently we have met
a child lending money to a parent to buy into aged care or a retirement village; and a parent lending a child money to buy into a home. Sometimes, down the track, there is uncertainty when things don’t work out as planned, as to whether the payment was a gift, or a loan.
Financial circumstances change, planning changes, and suddenly what appeared simple and straightforward becomes fraught with confusion and dissension. Was it repayable? When? On what notice? On what terms?
A recent case involved a woman who put $200,000 into a property owned by her daughter on the assumption she would live there for the rest of her life. In time, mother and daughter didn’t get on, mum moved out, and wanted her money back.
Nothing was documented. Was it a gift, a loan, an investment? There are conflicting versions between the parties and a court must now decide.
Another recent example involved two (of four) children lending money to mum and dad to move into aged care. They asked for the loan to be documented so that there could be no misunderstandings down the track when the estate ultimately needed to be managed.
This was prudent and ensures there is no confusion when the day arrives to deal with the refund of the aged care RAD when the estate needs to be administered.
Another example was parents lending monies to a child to buy a house. The loan was documented to ensure that if the house was sold there was no confusion that the loan was owing.
The parents may choose to roll it over to a new property or may, depending on their circumstances at the time, choose to have the loan partially or fully repaid.
Loans to children are particularly problematic. There can be a mind set of “inheritance impatience” where the feeling is that “it’s coming to me eventually anyway” so there’s no need to repay it.
This may place the parents in a difficult position when they need funds for aged care, retirement living, or health needs.
The bottom line is to put loans between family in writing if you want to avoid confusion and dispute down the track.