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Bank of mum and dad warned of legal risks

by Malavika Santhebennur5 minute read
Bank of mum and dad warned of legal risks

A law firm has warned of the potential risks of parents assisting their children with entering the housing market, particularly if the children separate from their spouse.

Barry.Nilsson principal Will Stidston said that family lawyers are seeing an increase in loan arrangements and financial agreements as the Millennial cohort borrow funds from their parents amid rising property prices.

According to Mr Stidston, a loan arrangement is a contract between a borrower and a lender, which formally documents the mutual promises made by each party and other key terms, such as those relating to repayment.

A binding financial agreement is a contract between married or de facto couples, which formally documents both parties’ property interests and how they are to be divided in the event that the couples separate.

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They can be entered into before, during and after a marriage or de facto relationship, Mr Stidston explained.

He said that while it is becoming common for parents to contribute to their children with home deposits to assist them with entering the property market, it carries risks.

He said: “We’re definitely seeing an increased number of parents wanting to assist their children enter into the property market.

“The concern is that in the event the child and her/his partner separate, five, 10, or even 15 years down the track, a significant portion of the parents’ money may be lost to the child’s spouse.”

As such, Mr Stidston recommended that parents should not gift money to children or become a guarantor on a loan on their behalf without considering all of the potential outcomes and risks.

“With either of these options, there is a significant risk that your child may either lose a portion of the money to their spouse if the relationship turns sour or potentially you will erode your wealth and assets in the event they can’t refinance the loan,” he said.

He also said that before parents gift money to their children, they should consider who they are gifting it to.

He quoted a 2020 ruling of the Full Court of the Family Court of Australia, which he said highlighted that the recognition of the benefit is dependent upon the intention at the time of it being made, which could result in the child and her/his spouse both receiving credit for the gift.

In addition, Mr Stidston said that while a loan agreement between parents and children can provide added protection, many have been successfully contested in family law courts.

“There have been several reported decisions in the family law courts where the loan agreement or loan arrangement’s terms are not found to be binding if, for example, they’ve simply been written on a piece of paper and not formally prepared,” he said.

“The decisions identify the importance of, among other things, formally securing a loan, insisting upon repayment(s), and formalising the terms before funds are advanced.”

A two-pronged approach

Mr Stidston recommended a two-pronged approach that incorporates both a loan agreement and a binding financial agreement to document how the advancements of funds will be paid out or treated in the event of a separation.

He added that this additional measure has become increasingly common amid an increase in the transfer of intergenerational wealth between families, a trend he predicted would continue.

“We’re finding that many of our younger clients are embracing financial agreements to protect their property interests because they’re a little more fatalistic than the older generations,” Mr Stidston said.

“They’ve seen what’s happened to other family members or friends, and they don’t want to put themselves at risk from a potential claim from their spouse.”

He concluded: “They’re very focused on protecting their future and are more accepting that relationships don’t always work out.”

[Related: Borrowers turn to bank of mum and dad in HomeBuilder confusion]

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Malavika Santhebennur

Malavika Santhebennur

AUTHOR

Malavika Santhebennur is a content specialist at Momentum Media, focusing on mortgages and finance writing.

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