To loan or gift? Financially helping children whilst protecting the family bank

With the ongoing housing affordability crisis placing increasing pressure on first home buyers, we are commonly asked for advice about how parents can help their children enter the property market. That assistance might be a contribution towards a deposit or reducing the balance of debt owed to a child’s financier, but ultimately the bank of ‘mum and dad’ wants to protect that advancement.

Before transferring any funds, families should consider one key question: is the advance intended to be a gift or a loan?

If the arrangement is not clearly recorded, it can create uncertainty for parents, children and executors. It can also become a source of dispute between siblings if one child has received significant financial assistance and others have not during their parents’ lifetime.

Gifts: simple, but no asset protection

A gift is usually made with no expectation of repayment. This may suit parents who are financially secure, want to provide immediate support, and are comfortable that they may have no recourse to those funds at a later time. It may also suit a purchase where the child’s financier requires confirmation that funds provided for a home deposit are not repayable.

However, the critical issue with gifts is that, if the child subsequently separates from their spouse or de facto partner, the gifted amount will likely be included in the pool of marital assets and taken into account in the family law proceedings. If the child becomes bankrupt or has claims brought against them by their creditors (if they operate a business), the funds may be difficult to protect and will be included in their pool of assets.

From an estate planning perspective, parents should consider whether financial assistance provided during their lifetime is intended to affect how their estate is ultimately distributed. If the goal is for children to benefit equally overall, the estate planning documents should include clear provisions to account for any significant lifetime gifts or advances. For example, a larger advancement made to one child may be deducted from that child's inheritance or offset by additional gifts to other children. Whatever the intended outcome, it should be clearly documented in the parents' wills and contemplated in the estate plan rather than left for children to debate after their parents' death.

Loans: protection depends on evidence

A loan may be preferable where parents expect repayment, want to preserve family wealth, or want to protect the funds if the child’s circumstances subsequently change. However, calling an arrangement a ‘loan’ is not enough. The arrangement must look and operate like a loan in practice. In a dispute, the court may need to decide whether the advance was truly a loan or was intended as a gift. Relevant matters can include whether there is a written agreement, whether repayments have been made, whether interest is payable, whether security was taken, and whether there is other evidence showing that repayment was expected. As explored in our article on the treatment of family loans in relationship breakdown proceedings, courts will generally look beyond the label applied to an arrangement and consider its substance and how it has operated in practice.

A well-drafted loan agreement should record the amount advanced, the parties, whether interest is payable, when repayment is due, what happens if the child defaults, and whether the loan is secured. For larger advances, particularly where funds are used to buy property, parents should consider whether a registered mortgage or other security is appropriate. Independent legal advice for each party can also help reduce later arguments about whether the arrangement was understood and agreed.

Align the arrangement with the estate planning strategy

The parent’s estate planning documents should deal with the arrangement. If the advance is a gift, the will can say whether it is to be ignored, equalised between children, or brought into account when the estate is divided. If the advance is a loan, the will can say whether the debt is to be repaid to the estate, forgiven on death, or assigned to that child as part of their entitlement.

Some parents assume that if a loan is forgiven on death under their will, the debt simply disappears and therefore cannot be taken into account if the estate is later challenged. Although a will may provide for a debt owed by a child to be forgiven on the parent's death, the value of that forgiven debt will often still be regarded as part of the deceased's estate for the purposes of a family provision application. In practical terms, the court may treat the forgiveness of the debt as a benefit received by that child when assessing the size of the estate and determining whether adequate provision has been made for other eligible applicants. As a result, debt forgiveness should not be viewed as a mechanism for removing value from an estate or avoiding potential family provision claims. Parents considering this approach should ensure that the treatment of any loans and the reasons for forgiving them are carefully considered as part of the broader estate planning strategy.

Where asset protection is a priority, parents may also consider utilising testamentary discretionary trusts in their wills. Rather than forgiving a loan on death or requiring it to be repaid directly to the estate, the will can provide for the loan to be assigned to a testamentary discretionary trust established for the benefit of that child and their lineal descendants. The child may hold positions of control and management within that trust, while the loan remains an asset of the trust rather than being held by the child personally. This can help preserve some of the protective features of the original loan structure, particularly where there are concerns about relationship breakdown, creditor exposure or intergenerational wealth protection.

One of the benefits of testamentary discretionary trusts is that they can effectively operate as the ‘family bank’ after the parents' death. If the will does not include testamentary discretionary trusts, it is not possible for the loan to be assigned to the child in their personal name, as they would effectively have a loan with themselves. By having a trust that is a separate and distinct entity from the child, it allows the protective features of the original structure to be preserved even after the parents have died.

Other ways to structure financial support

Loans and gifts are not the only options. Some parents act as guarantors, co-purchase property with a child, or hold property through a trust structure. These approaches may assist with borrowing capacity or structuring, but they can involve more complex tax, duty, asset protection, family law and estate planning issues.

Implications for your estate plan

Decide the character of the advance before money changes hands. If it is a gift, record that clearly and update the estate plan if equalisation between your children is intended.

If it is a loan, document the terms, consider security, keep repayment records and ensure the will explains what happens to the debt on death. In appropriate cases, this may include assigning the loan to a testamentary discretionary trust rather than forgiving it or requiring immediate repayment. Being clear and open with your children throughout this process and ensuring this is reflected in your estate planning documents will assist with reducing the risk of disputes or claims against your estate after you have died.