Hillhouse Legal Partners touched on this subject back in 2021[1] but now the Bank of Mum and Dad is used by 2 in 5 first home buyers[2] and is somewhere between the 5^th and 10^th largest Australian lender, lending annually around $92 billion[3] with an average of about $92,000 being lent by parents to children.[4]

The legal, financial and taxation advantages and disadvantages both for Mum and Dad and for the children have to be considered and thought needs to be given how best to ensure everyone goes into the transaction with open eyes and advice.

People don’t like Banks[5] and the Bank of Mum and Dad may be no different. Getting it wrong and sometimes even getting it right can lead to family conflict and falling out with allegations of favouritism or emotional blackmail.[6] 

If such gifts or loans are going to be advanced and money given or lent then the lenders/donors and borrowers/recipient should obtain separate independent taxation, accounting and financial advice as well as separate independent legal advice.

Start with Clarity

Treat the transaction like any arms’ length transaction or business dealing. 

Both parties should have separate independent legal advice (as well as separate independent taxation, accounting and financial advice).

At the very least any agreement or arrangement should be in writing and an acknowledgment of the receipt of the money should be obtained and kept by the Bank of Mum and Dad.    

The terms of the transaction should be clearly stated in the document.

If it is a gift, say so.

If it is a loan say so, and on what terms the loan is given.  If there is interest to be charged how is it calculated, if there is to be security or a mortgage say so, and if necessary register a mortgage on the house title.  If principal has to be repaid by a certain date or event, say so.

If the parents are to own part of the property (to be put on the title) or live on the property then say so but make sure everyone knows the legal and practical advantages and disadvantages of such a strategy.  Make sure you talk to your lawyer, financial planner, accountant and tax adviser. 

Even with the best of intentions between Mum and Dad and the children, things go wrong.  Circumstances occur outside the parties’ control that frustrate the best of intentions. People get divorced, markets change, people die, people enter into bad business decisions, and people go bankrupt.  Put it all in writing and have a lawyer review it and advise you.   

What Happens Next?

Mum and Dad may need to consider how they deal with the loan or gifts to one or more children in their Estate Plan.

Sometimes in their Estate Plan and Wills people will forgive loans in part or in total, sometimes they will equalise such loans and then forgive, on other occasions they will ensure that children to whom money was not lent receive more in the Will.

Not giving it thought and not properly documenting it in an Estate Plan can lead to conflict and in worst case scenarios to litigation causing significant emotional stress, time and the Estate to also be financially depleted, sometimes greatly.

Again, we stress legal advice should be sought.

Plan It All Out

Borrowing from the Bank of Mum and Dad needs thought and planning by everyone.  It is vital that:

• Advice should be sought by everyone, a plan thought through, considered and implemented and documented;

• Documents then prepared and signed;

• The Plan then implemented and followed through; and

• If appropriate an Estate Plan and Wills drafted.

Planning and documenting out the intended transaction clearly, avoids confusion and misunderstandings, and manages the expectations of those involved.

We can advise you in relation to a proposed gift or loan to your children as well as help you document the transaction and the security and your Estate Plan and Wills, or if you are a child receiving a gift or loan provide advice on the proposed loan and security. To make a time to discuss your personal circumstances simply send us an email or call 07 3220 1144.

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[1] https://hillhouse.com.au/blog/lending-money-to-children/

[2] Money Magazine, 2 February 2024 Wotton, T https://www.moneymag.com.au/bank-of-mum-and-dad-and-gift-letters-what-you-need-to-know

[3] Australian Financial Review 19 March 2021 Hughes, Duncan https://www.afr.com/companies/financial-services/bank-of-mum-and-dad-contributions-hit-34b-20210317-p57bkz  Ceyda Erem Mozo 4 March 2020 https://mozo.com.au/home-loans/articles/bank-of-mum-and-and-dad-report-2020

[4] Australian Financial Review 29 November 2023 Wootton, Hannah  https://www.afr.com/companies/financial-services/the-bank-of-mum-and-dad-is-good-for-70-000-new-analysis-concludes-20231129-p5enpp

[5] SMH 4 December 2017 Hanna, C https://www.smh.com.au/opinion/its-time-we-thought-a-bit-harder-about-why-we-hate-banks-20171201-gzwtin.html

[6] ABC Radio Perth 3 March 2024 Wynne, E https://www.abc.net.au/news/2024-03-03/the-hidden-costs-of-borrowing-from-the-bank-of-mum-and-dad/103514150