Of course, parents want to assist their children and that often extends to financial assistance. Sometimes, adult children expect a parent to assist. Before money passes hands, families need to consider how they can avoid creating any unforeseen legal consequences.
Courts have previously commented on the vulnerability of parents who contract with their children, which often “stems not from a failure to comprehend the nature of the transactions in which they are asked to participate or from insufficient information concerning their implications. It stems from the love of their children. Their desire to help and protect them, to advance their interests, to maintain a close relationship, to avoid causing disappointment, hurt or distress, to maintain the relationship all make it difficult to say “no”’ (Watt v State Bank of New South Wales [2003] ACTCA 7).
A recent case
Moores recently acted for a client whose sibling had signed loan agreements with their mother, in her capacity as the mother’s attorney (lender) and in her personal capacity (borrower). Our client was concerned about whether the arrangement was above board. While the signing of the loan agreement on behalf of the lender and as borrower is a conflict of interest, was the advancing of the loan contrary to the mother’s interests? In the circumstances, it was not because:
- There was a written loan agreement
- Mum took security over the daughter’s property, in the form of a registered mortgage
- The interest rate was higher than the interest rate Mum would have received had the funds remained invested
- Mum had sufficient cash at bank, liquid investments and property interests – she was in a position to meet her ongoing obligations and aged care costs if the daughter defaulted.
Had Mum been in different financial circumstances, or had the loan arrangement been undocumented or at a 0.00% rate of interest, the circumstances may have allowed the sibling to challenge the arrangement as amounting to unconscionable conduct, and to have the loan agreement set aside.
Key issues to consider
If you or your clients are considering an intra-familial loan arrangement, there are some key issues that they should consider before doing so:
- Is the advance of funds a loan or a gift? If a loan, what are the key terms and how will it be documented and secured? What will occur if the loan agreement is breached? If the loan agreement is breached, will that impact on the lender’s ability to meet their own costs of living?
- If the lender has lost capacity, their personal legal representative must consider whether the proposed arrangement is in their interests
- How might the advance of funds interact with family law if the adult child is married or the relationship breaks down?
How we can help
Moores can provide you or your clients with specialist legal advice about matters to consider before an advance of funds is made, and can document the arrangement as required. Please do not hesitate to contact us.