We have all seen it before – the statistics suggest that mum and dad barely have enough funds to retire with. However, they want to help their son by giving him money. Perhaps he overspent on flash cars and a large boat, or perhaps he ran into some business trouble, or maybe they just want to help him “get ahead”.
There are several potential issues with this. For example, what if the son goes bankrupt? What if the son goes through a break-up or divorce? What if he passes away?
Advancing money to children on certain conditions is one thing, but if your clients are going to do it, they should make sure it is documented correctly.
They need to consider all the “what ifs” and protect their interests by documenting what the actual arrangement is. For instance, is the money given as a gift or is it actually a loan that is only intended to be repaid if certain events occur (such as death, divorce and bankruptcy)? Is it intended to be repaid over time? Is interest to be charged? Should the loan be secured by a mortgage or other means so the parents have some priority in a bankruptcy situation? Is there actually a trust being created with the money never forming part of the child’s property?
On the other hand, if it is intended to be an unconditional gift, then it should be clear – so that there are no contests about the son owing money to the parents’ estate upon their deaths. If the arrangement is not documented, depending on the circumstances, it may later be difficult to prove one way or the other.
Documenting a family arrangement such as this, can assist in achieving what was intended to be achieved should the unwanted or unexpected occur. Otherwise, a trustee in bankruptcy may use those funds to pay creditors before the parents, and a former spouse may receive some of those funds through a property settlement.
It is also always a good idea for clients to consider their estate planning when entering into arrangements like this. For example, they may want to adjust gifts to their other loved ones taking into account this arrangement, or they may need advice on family provision issues if there is a risk someone might challenge their Will.