top of page
  • Gabriella Ferraro

Loans and gifts to family members

Written by Tatiana Holguin

Edited by Dannielle Wright

Given the current economic climate, it is fairly common for family members to provide each other with loans and financial assistance. However, if there is no formal document detailing the loan, or a clear understanding that monies advanced are by way of a gift, disputes may arise. As such, it is important that all parties involved are able to differentiate between a formal loan or a gift.

A loan agreement is a written contract between two parties whereby one party (“the lender”) agrees to provide a loan to the other party (“the borrower”). The document typically contains details regarding:

· the purpose of the loan,

· the amount being advanced,

· the due date for repayment,

· the interest to be applied and

· any securities that may have been provided.

The loan agreement is then executed by both parties. On the other hand, a gift is provided without the expectation to receive or gain any benefit in return.

It is important that the parties understand if they are receiving a loan or a gift by having open and frank discussions and obtain legal and taxation advice to reduce the risks associated with providing the loan or the gift. Seeking advice from a professional can provide clarity to an otherwise complicated situation.

In the event that parties decide to advance monies by way of a loan, it is crucial to document the terms and conditions on which the funds are being borrowed. For example, if a parent lends money to their child to cover the deposit for a property purchase with the understanding that the funds will be repaid, it is vital to formalise the arrangement through a loan agreement that details the loan’s terms and conditions. This can assist the parties in recovering funds in future family law disputes if the lender has security over the amount that has been advanced. You can read more about Loan v Gifts in Family Law Matters in our article below.

As indicated above, it is important to obtain legal and taxation advice to identify any associated risks. In particular, it is important to understand the implications in the event the borrower becomes a bankrupt or is amidst a family law dispute.

A further risk to consider is the death of a party to the loan. Prior to lending funds, the lender should consider whether the loan should be forgiven at death or whether an express clause should be inserted in the agreement to reflect the repayment of the loan in event of death of the borrower. In circumstances where the lender fails to consider whether the loan should be forgiven or repaid at the borrower’s death, the estate of the deceased will be liable for the debt.

If you are considering lending or advancing funds by way of a loan or gift, please do not hesitate in contacting our office to speak with one of our experienced lawyers.

18 views0 comments


bottom of page