It seems these days more than ever, parents are helping out their adult children financially. It’s fairly common place for parents to want to help out their children, whether they’re lending money to to support a business venture, repay debts or help buy property.
Ideally the money is paid back over time and parents are able to safeguard your own financial future, while maintaining a good relationship with all of their kids.
Unfortunately lending money to family members doesn’t always go to plan. It’s not unusual for loans to never be repaid, or funds to be only partly recovered, and it can become even more complicated if one or both of the parents pass away while the loan is still outstanding.
Without any formal loan agreement and it being taken into account in estate planning, the lender can suffer financially and rifts can be created within the family that potentially last forever.
Do I really need a loan agreement for family?
Almost every parent who lends money to their children or other family members, assumes they won’t need to formalise the transaction. Everyone likes to think that family members will ‘do the right thing’ and stick to any verbal agreements. Sadly this doesn’t always happen.
One of the most common issues is misunderstandings over whether the money was a ‘gift’ or ‘loan’. A gift is not required to be paid back, but a loan does requires repayment.
It can be very difficult to prove a loan was in place without legally enforceable loan agreements, which can be problematic if the matter goes before a court. A signed and dated written loan agreement provides some safeguards that the money can be recovered and provides a formal record that can be taken into consideration in an estate plan.
Importantly, formalised loan agreements can help avoid animosity between family members and preserve relationships.
We’ll work it out later
Often loans are made to family members under urgent circumstances and it’s easy to say, ‘here’s the money, we’ll work the details out later’. The problem happens later down the track, when repayment expectations aren’t met. Borrowers may claim to have forgotten any conversations or verbal commitments made.
A written and signed loan agreement preserves what both parties agreed on. While an oral contract will not achieve the same level of legal certainty.
What does a written loan agreement contain?
A written loan agreement often contains the following terms:
- The amount of the loan.
- Interest rates, if any.
- The term of the loan.
- How the loan is to be repaid (lump sum, installments).
- Method of repayment (cash, direct credit, bank cheque).
- Security for the lender if required.
Loan agreements and estate plans
Any outstanding loans to family members should also be formally documented as part of your estate plan. This is incredibly important so all beneficiaries feel they have been treated fairly.
It’s not unheard of for a borrower to fail to mention any outstanding loans to a deceased family member, in an attempt to secure a larger proportion of an estate than they may be entitled to.
What next?
If you have loaned or are considering lending money to a family member or a friend, you should consult a solicitor to help you prepare a comprehensive loan agreement. You should also contact a Wills and Estate legal professional, such as Gill & Lane, who can help you formally and legally document any loans as part of your estate plan.