Article by Avant Group - Stories from the Law Desk: Chapter 3 – The Bank of Mum and Dad

Stories from the Law Desk: Chapter 3 – The Bank of Mum and Dad

Posted: 3 May 2022

Isn’t it great now in our (near) post-Covid impacted life that the restaurants and cafes are open and we can again share a meal and a drink with family and friends?

In that regard, we were out with friends last week and the discussion of the Bank of Mum and Dad arose. One couple at the table who had a married daughter with three small children were contemplating some financial assistance for their daughter and son-in-law to extend their small regional home.

Our friends are financially secure and could easily advance the $350,000 required for the home extension.

The next question was how this transaction should be undertaken? Our friends were simply contemplating a transfer of $350,000 into the young couple’s joint account.

The question then is; was this proposed transfer a loan or is it a gift? And following that question; what are the implications of either scenario?

Approximately one in three marriages in Australia end in divorce. This statistic can’t be ignored when contemplating an advance of $350,000. If it is a gift, then in the event of the young couple separating then in negotiations regarding any financial settlement, the son-in-law would claim, in the absence of any evidence to the contrary, that the sum advanced was a gift. That gift would increase the family’s asset pool and thus potentially the amount which would be allocated in a financial settlement to the son-in-law. 

In the case that the sum advanced is a loan to the couple, then the loan would be considered in any marriage break up as a loan to be repaid by the couple to the parents. That reduces the pool of assets to be divided between the parties and consequently improves the daughter’s position. 

There was also another issue that crept into the conversation and that was the son-in-law’s business. The loans advanced to the business were secured by the business’ assets and the son-in law’s personal guarantee. 

If the sum advanced by our friends was considered a gift and the business failed, that gift would most likely form part of the security for the bank’s loans. The bank would look first to the business assets and then the personal guarantee. The son-in law’s major asset is the family home thus in the case of a shortfall in the business assets, the bank would look to the equity in the family home to cover its position. 1

If the sum advanced however is a loan, and the loan is secured by, for example, a second mortgage over the property, then in the event of the son-in-law’s business failure, the loan would be secured and not form part of the asset pool from which the bank could claim. 

What is the message in this tale from the law desk?

If the Bank of Mum and Dad is contemplating a monetary advance to an adult child:

  1. Advance the money as a loan to the child, or if he/she is married, to the couple jointly;
  2. Document the transaction by having a loan agreement drafted by a competent commercial lawyer; 
  3. Ensure all parties execute the loan document so there is no future argument as to in what form the monetary advance was made; and
  4. Last but not least, make sure that parties abide by the terms of the loan agreement.  It cant look like an artificially contrived transaction to defeat creditors or protect a party in the event of marriage breakdown. Interest should be payable at set times at commercial rates, the term of the agreement stated, repayment events stipulated etc.

This recommendation might seem to be very formal and will require some effort in managing the loan, however where there are often hundreds of thousands of dollars involved, some careful consideration of the nature of any advances from the Bank of Mum and Dad can save a lot of money and stress in the long run.

[1] Consideration of the legal concept of the equity of exoneration should also be made in these circumstances, however this legal concept, although relevant to this scenario is not dealt with in this article.

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This article is not legal advice and should not be relied upon as legal advice. All articles from Apres Legal are intended to provide informative information. Legislation and case law may have been simplified and/or paraphrased. If you would like legal advice based on your current circumstances, you should contact Apres Legal.