Does the bank of mum and dad fully understand the risks of providing financial assistance to their children?
Bendigo Bank run a tv ad about them being the better big bank snapping at the heels of the four majors. It makes you wonder how big the bank of mum and dad has become as the demand for financial assistance to get into the housing market increases.
While the desire to help children achieve homeownership is admirable, does the bank of mum and dad fully appreciate the potential risks and take necessary precautions to protect their assets? Let’s shed some light on relationship breakdowns and bankruptcy risks and where you might start to get advice on achieving some asset protection.
Relationship Breakdowns: One of the primary concerns for parents providing financial support to their children is the risk of relationship breakdowns. While it’s uncomfortable to consider, unforeseen circumstances can arise, such as separation or divorce, which may lead to disputes over property ownership and financial contributions.
Bankruptcy: Another risk to consider is the potential bankruptcy of children. Financial difficulties, unexpected events, or business ventures gone awry can lead to bankruptcy, placing parent’s investments at risk. Here are some protective measures to consider:
To reduce these risks, parents should consider the following:
- Formal loan agreement: Rather than treating the financial assistance as a gift, advice should be sought on structuring it as a formal loan. A loan agreement should outline terms, repayment schedules, and any applicable interest rates. This formal arrangement may protect parent’s interests in the event of a relationship breakdown or bankruptcy. A loan may be recoverable through legal means, unlike gifted funds.
- Property ownership structures: Parents can explore different ownership structures, such as a family trust or property held in the child’s name with a registered mortgage in favour of the parents. These structures may provide added protection and control over the property to safeguarded investments. This may provide an added layer of protection, as the property can be sold to recover outstanding debts in the event of bankruptcy.
- Insurance: Parents can explore the option of requiring their children to obtain suitable insurance policies, such as income protection or mortgage protection insurance. These policies may offer support in challenging circumstances, reducing the risk of default or bankruptcy.
- Get advice: Seeking professional advice from a lawyer, accountant or financial adviser can provide valuable guidance on the legal, tax and financial implications of assisting children with property purchases. This advice can help parents navigate complex legal frameworks and make informed decisions.
By being proactive, parents can put steps in place to protect their assets to give them the best chance that their financial well-being remains intact. It’s important to approach these arrangements with open communication, legal documentation, and sound financial planning to safeguard the interests of both parents and children.
This article provides general information and should not be considered as legal, taxation or financial advice. Please seek advice from a qualified professional for personalised guidance on your individual circumstances.
Brendan Fahy is a Director at Keep Wealth Partners
Keep Wealth Partners Pty Ltd (AFSL 494858)
