Protecting gifts to children

No doubt in part due to the recent property boom and hugely inflated Sydney house prices, many parents have decided to give their children a head start by providing either a gift or an early inheritance, so that their children can enter the property market. However, with divorce rates at their highest ever in Australia, many parents fear that their children may lose some or all of the parents' gift in the case of family law proceedings or financial difficulties.

There are relatively simple, practical steps that a prudent parent, or grandparent, can take to protect such a gift.

Provide a loan, not a gift

Consider this recent very normal scenario.

One of our clients approached us after she had retired and received her superannuation payout. She had a surplus of available cash from which she wanted to provide her daughter with funds so she could purchase her first property in Sydney. Her daughter was single, and her mother was concerned about the possibility of a future relationship turning sour, resulting in the gift to the daughter not being secure in case of divorce or other family law settlement.

Determining a division of property after a relationship breaks down generally involves putting all of the assets into a pool and deciding the appropriate split. If the money provided to the daughter is a gift, the benefit of the gift forms part of the pool of assets which the other party will share.

For this reason, our advice was that the money should be provided as a loan, not a gift, even though our client never intended for her daughter to repay the money.

Secure the loan with a mortgage

We also arranged for the loan to be secured with a simple mortgage over the daughter’s interest in the property she was buying. Loan agreement and mortgage provided that the loan would be interest-free, and will be repayable only if the property were sold, or if the mother gave 3 months’ notice requiring repayment.

Binding financial agreement

The gift was further protected by special clauses in the mortgage providing that if the daughter entered into a de facto relationship or marriage, she must enter into a binding financial agreement (“BFA”) with her partner, otherwise the loan would be immediately repayable. The mortgage required that the BFA provide that the daughter’s partner shall make no claim in relation to the property. When a couple has been living together for some time, it can be difficult to raise the topic of a BFA. However, if there is a legally binding agreement to do so in order to avoid the mortgage being repaid, that makes it a much easier topic to raise.

Protection in the case of death

A further term of the mortgage provided that that the daughter was to make a new will leaving the mortgaged property to her mother, and requiring that any will that she should make in the future replacing that will should contain the same provision.

The bottom line…

Taking the relatively simple step of placing a mortgage over a property in a situation where a parent helps a child in purchasing that property allows both the parent and the child the security of knowing that a gift, loan or early inheritance will be safe with the intended recipient.

For further information please contact Andrew Somerville.