Lending money to your children or family? Why your money may not be protected.
If you have lent or are considering lending money to your children or family without obtaining legal advice or in the absence of having professional prepared legal documents in place, listen up.
Your money is not protected!
What do we mean your money is not protected?
“My kids would never do that to me”, “I trust my children”. We hear it all the time. And we trust your children too! It’s not them……it’s us.
We want to ensure that your hard-earned money is protected. By this we mean protected from the legal implications that can arise when money is given to children or family members with little to no forethought about future situations that could see your hard-earned money gone, with no legal grounds for you or your children to rely on or without documentation that sets out the arrangement (people have short memories).
What are we talking about?
We are talking about situations such as bankruptcy, relationship breakdowns, the death of a borrower, financial hardship or influence from someone else. Whilst they are not things that we like to think about now, consideration must be given to them if you wish to protect your hard-earned funds. These situations do arise, and they arise more often than you think.
How do these situations put my money at risk?
It is easy to say I lent money to my kids, produce a bank statement showing payment from your account to theirs and then request your money to be repaid. Unfortunately, however, it does not work like that. Let’s take a look at each of these scenarios.
1. Bankruptcy. If the borrower finds themselves declaring bankruptcy, aside from the obvious fact that if there is not enough money to be repaid to you, you won’t get your money, you are less likely to recover your money if your loan was not secured and there are no legal documents in place. Preference is given to any secured creditors first which means you may not get a cent, or you may only get a portion of your money back.
2. Financial Hardship. Similar to bankruptcy, if the borrower cannot repay you, you have no security for your funds.
3. Death of a borrower. Unfortunately, this is not a situation that anyone can foresee. If a borrower passes away, what happens to your money can depend upon what their Will says, if they left one, or the laws of intestacy if they did not leave a Will and in the absence of any legal documentation and security for your funds, there is no guarantee that you will get your money back. There is risk that the executor of your child’s estate could argue that the money was a gift and not a loan.
4. Death of a lender. If you or your partner pass away before the loan is repaid, things can get very messy. If you are a sole lender and you pass away, your Executor or Administrator will be in charge of determining what will happen with this loan and the money. Will they need to call in the loan from your child who may not have capacity to pay it back yet? Do they adjust this loan against that children’s inheritance if they are left any? This situation can pretty quickly lead to costly estate disputes, minimising your estate that you intended to leave for your beneficiaries.
5. Relationship breakdowns. One big factor that is often the cause of lenders losing their money, is your children’s relationship breakdown. Again, this is a situation that you might not have seen coming. Or maybe you did. Call it parents’ intuition. Regardless, in the absence of proper legal documentation and security for your funds, we are now seeing that more often than not, Courts interpret the loan to your child a “gift” rather than a loan, particularly when there is no supporting documentation or registered mortgage.
What this means is your money is added to the matrimonial asset pool and divided between your child and their ex-partner or however the Court sees fit, instead of being deducted from the asset pool to be repaid to you before assets are split. And with family law proceedings, things do not always go how you think they should.
If this happens, your funds are treated as if they do not have to be repaid meaning your child is left with whatever assets the Court grants them, and the only hope of repayment of your funds to you is that your child is left with enough to do so.
But that is not all!
Yes, there is more. One common scenario that can arise in each of the above situations that we just touched on briefly, is the question of whether the money was really a loan, or if it was a gift. Whether it is a matter of bankruptcy, death of a lender or borrower and particularly relationship breakdowns, this question is one that will always arise and in the absence of properly prepared legal documentation, you guessed it, your funds will more than likely be treated as a gift that does not need to be repaid. Not a risk you would want to take.
I can prepare my own loan agreement then to protect myself, I do not need to pay a legal professional do it.
You can. But would you build your own house if you were not a qualified or experienced builder? Most likely not. Do-it-yourself or ill-prepared loan agreements will not cut it when it counts most. Most loan agreements that are not prepared by a legal professional will lack the most crucial elements that are actually your protection in any of these situations arise.
And before you think about the cheapest way to protect yourself, do not rely on AI generated loan agreements or “legal documents”. We have tried and tested AI and whilst it can give you an overview of what to do, if often gets things wrong or misses steps. But, it is these steps that are often the most crucial steps or clauses that is the difference between your money being protected or not.
What do I do if I want to lend money to someone?
Come and see us as soon as possible. We go through your exact intentions and circumstances and draft the correct agreements and security to ensure that you are protected. You can then lend your hard-earned money knowing it will be protected no matter what situation may arise. If you need assistance, contact our experienced team today.