3 ways to protect the Bank of Mum and Dad

With Australians living longer and the cost of retirement on the up, deciding whether to help children out financially can be a conundrum for some parents.

On the one hand, you need to make sure your retirement savings will go the distance, and on the other hand, you may want to help your children get ahead.

Whether you’re contemplating a financial gift or loan, purchasing a property together, or going guarantor on a home loan, there are risks to be aware of, and these risks require careful consideration.

There are, however, a few ways that you can help protect yourself (and your children), and one of them is to legally formalise your financial arrangements.

While this may seem a bit unnecessary, the reality is that things can and do go wrong—relationships break down and family fallouts happen. Putting in place legal arrangements now while everyone is on good terms can be easier than trying to solve any issues when circumstances change and emotions are running high.

Family Lawyer, Bhavesh Mistry, outlines three options that could help with protecting your finances—and your relationship with your nearest and dearest.

1. A formal loan agreement

If you’re considering loaning money to your children and want to reduce any potential impact on your own retirement lifestyle and/or legacy to your children, a formal loan agreement that sets out the terms of the loan might be worth considering. Please note: Oral agreements or handwritten agreements can be vague, and in the event of a dispute, the loan is more likely to be viewed as a gift by a court of law.

Depending on the circumstances, a formal loan agreement may include:

• details around the intention of the loan
• the loan amount  
• the parties to the loan
• confirmation that the funds were transferred to your child’s sole bank account
• details of any loan repayments or interest
• any existing lodgment of any security over the property, such as caveats or mortgages, and any rights to secure the loan in future
• when the loan must be repaid.

Even if you have no intention of requesting repayment of the loan, circumstances can change. For example, you may need the money in the future. Or, your child may share the money with a new partner, or separate from an existing partner. Including a provision to request repayment of the loan gives you more options and may help protect your child from losing the money in a separation.

2. A Co-ownership agreement

If you’re thinking about buying a property with children, you might consider putting a co-ownership agreement in place for some protection and peace of mind. A co-ownership agreement is a legally binding document that sets out the rights and obligations of each owner, and can help provide certainty around how any potential future issues may be dealt with—in the event they were to arise.

For example, if you or your child wants to sell the property, if large unforeseen costs come up, or if there are issues with loan repayments, a co-ownership agreement provides clarity on what is to happen in these scenarios. 

Depending on the circumstances, a co-ownership agreement may include:

• how long the co-ownership will last
• the property price and how the property is being paid for
• rights around access to the property
• the purpose of the property (for example an investment vs shared or sole use)
• who is responsible for managing and contributing to expenses, maintenance and repair
• what happens where a co-owner would like to exit the arrangement or sell their share
• how disputes will be resolved.

It’s important to understand that when you enter a co-ownership arrangement, you hold the property as ‘tenants-in-common’, rather than joint tenants. This means that ownership of the property does not automatically transfer to the other owner on death, so you’ll need to consider what you want to happen with your share of the property if you were to pass away. To ensure your wishes are carried out, additional provisions can be drafted in your co-ownership agreement so that they become legally binding on your estate.

3. Establishing a family trust

A less common option, but one that can be useful if your children don’t immediately need money to buy property, is to establish a family discretionary trust. As parents, you can become the trustees, and your children become the beneficiaries.

Setting up a discretionary trust means that any funds or assets you are intending to transfer to your children are held ‘on trust’ for your benefit and the benefit of your children. This allows you to retain control over the money, and transfer capital and income to them over time, or by way of a loan as you see fit.

Setting up a family discretionary trust structure can be costly and comes with tax implications, which is why it is uncommon and generally used in more complex scenarios where there is capital income or assets to distribute.

Some final thoughts

All of these arrangements may have implications for your Age Pension entitlements. For example, a formal loan could be counted as a financial asset. A co-owned property may or may not be treated as your home and depending on the arrangement, could trigger the deprivation (gifting) provisions. And, a family discretionary trust that you have established could also be included when your Age Pension is calculated.

Entering into a financial arrangement with children can be a big deal. Before you make any decisions around which (if any) of the above options may work for you and your family circumstances, it’s important to consider seeking professional and qualified advice (eg legal, financial and taxation).

The information contained in this article represents the views and opinions of Bhavesh Mistry, who is not affiliated, associated, authorised, or endorsed by us. In addition, this information is intended for educational purposes only, and does it take into account your objectives, financial situation and needs. For further information or clarity on anything that has been discussed in this article, please consider seeking qualified and professional advice.