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The Pros and Cons to lending to your children

The Pros and Cons to Lending to your Children

In my last article I wrote about the pros and cons (in my opinion) of gifting to your children when you want to give them a leg up (say, help with purchase of a first home). In this article I refer to ‘child’ or ‘children’ but I am talking about adult children.

In this brief article I would like to consider the pros and cons (in my opinion) of lending money to your children. Lending is different to gifting. When you provide family with a gift you are not going to recover this money from them – it’s gone. It becomes their money. When you provide a loan to family however the money is repayable.

The major benefit in my mind for lending to children instead of gifting is that the child’s inheritance is protected in the event that their own relationship ends. If you loan money to a child who spends it on (say) a home, then if their relationship ends you can call up the loan. The loan becomes another debt that the couple must take into account when dividing their property. If the loan is big then the entire net equity in the home (after bank debt) may be owed to the parents. In these circumstances if the loan can be proven then a common resolution is for the parties to agree that the debt is now a debt of the child alone. The separating spouse would receive no credit for the input into the home funded by the parents, but at the same time he or she would have no liability to repay the parents. The inheritance would be protected. If that is not agreeable and the house is forced onto the market to sell, then after the bank is repaid the parents are repaid. Again, the child can often end up with that money back into his or her hands (by way of another loan) and can get themselves into a new house.

I need to point out that this very often seen as unfair by the separating spouse (the non-child) – but the reality is if the parties borrow money from the parents, and sign a document confirming it is owed, then it is owed. Most of the time these loans are interest free (or interest on demand only), meaning the child and his or her spouse enjoy a considerable benefit and the comments about the structuring being unfair are usually unfounded – the separating spouse (non-child) has received the significant benefit of the use of the money without interest, and possibly also this being the sole way to ‘get into’ a home.

In terms of the downside of lending, there are two that immediately come to mind:

• The Con of lending – for the parents – is that if there is a WINZ assessment the money will be due / owed. It may need to be called up. At the very least WINZ would treat the non-calling up of the debt as deprivation as the parents could if they wanted to call up the debt. This will impact on the parents if they are looking at moving into care – they will most likely be asked to pay for their care. But they may not have the money to do that.

• The Con of lending – for the children – is obvious. They may have to repay the money! This could occur for example if the parents needed to go into care and had no assets of their own – only the ‘debt’ owed by the children. They may have to repay the money or fund that care. Equally there is the risk that money may be owed to a parent but not forgiven in a will, which means it could have to be repaid to a deceased parent’s estate following a death.

If you are looking to provide funds to your children, by way of a loan or a gift, the best advice I can give you is to speak to your lawyer so that you are aware of what exactly you are getting yourself into.

• Posted By: Graham Day on Tue, 26th Jul 2016 @ 12:19:07

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