It Depends – Should I gift or loan money to a family member?12 July 2021 Topics: Estate planning, Professional advisers
In this edition of ‘It depends’, senior associate Steven Jell talks about making gifts or loans to family members.
Hi, in this edition of It depends, we’re going to talk about making gifts or loans to family members.
What is the difference?
So the key difference between a gift and a loan is an obligation to repay. So if I give away a sum of money, then I do not have an expectation that I’ll receive it back. However, if I loan money to somebody else, then my expectation is that they will have an obligation to repay it to me at a later date.
Why do we care?
Well, we may not if the amount’s small or insubstantial. However, if the amount’s large, then it may be better to classify it as a loan rather than a gift. For example, if a parent provides a sum of money to a child, and that child acquires an asset, what happens when that child separates from their partner and their partner seeks to make a claim over that asset, or if the child becomes a bankrupt and the trustee in bankruptcy seeks to take control over the asset. In those situations, the parents are going to likely want to call the amount back in. Similarly from an estate planning point of view, if the parents have more than one child, then it may be better to classify the amount as a loan so that it can be appropriately adjusted under their estate planning arrangements.
What documents do I need?
Writing it down becomes really important, particularly when we’re looking to prove that it’s a loan as compared to a gift later on. Normally, what we do is we prepare a loan agreement.
The purpose of that document is for the borrower to acknowledge their obligation to repay the amount they received later on.
We can also include terms like interest rate, or whether the amount is provided on interest free terms, and the circumstances in which we can require the borrower to repay it later. We should also consider security. The purpose of the security is to ensure that we can take possession of a particular asset ahead of unsecured creditors.
How should I deal with loans owing to me as part of my estate plan?
So it depends. Control is probably the most important thing, making sure that we know who’s going to act on behalf of the lender in the event of their incapacity or death. Now, from an estate planning point of view, we can forgive it under a Will, we can require the amount to be called in, or we can get more creative and give the amount owing to an estate to a testamentary trust, for example, so that we can continue with the ongoing family law or bankruptcy protections under those arrangements.
So, if you or one of your clients have any questions regarding making a gift or a loan to a family member, please feel free to contact me for one of the team.