Loan or gift?
Giving your children a helping hand financially seems like the right thing to do, but it can easily go awry without proper documentation.
Providing money to your adult children can pose all kinds of risks, especially if it is not carefully documented and if your child’s circumstances change, for example, they become divorced. Without documentation, assets such as property form part of a joint pool upon separation, meaning your child’s ex-partner may end up with a house in which you contributed towards a deposit.
Furthermore, if your children are in business, a creditor may make a claim on the money you have provided or an asset you helped to fund, i.e., property.
Parents who lend money without documentation of what the money is being provided for, risk the money lent being viewed as a ‘gift,’ even if it was intended as a loan.
If a parent wishes to provide money as a loan, it should be clearly stated in writing, the terms of the loan must be specified, such as the duration and if interest applies, and it should include a written intention that the money is to be repaid. Having the document signed and dated by both parties is also critical as well as keeping regular evidence of loan repayments.