What is the best way to provide your children with financial assistance?

Business Development Specialist - Ceebeks Business Solutions for GOOD

Most parents think they are being kind when they gift money to children but is that the best course of action?

In this blog post we look into two examples, and three tips to being smart, not sad parents.

We’ve had a number of enquiries about how to best to best provide children with financial assistance. Most parents think they are being kind when they gift money to children. That is often not the best course of action. If the child divorces or goes bankrupt the money is lost.

Example 1. Sad Parents

Mum and Dad give their daughter, Joanne $400,000 to buy a house. She then marries Ken. Ten years later Joanne and Ken divorce. The house is still worth $400k. It is the only asset of the marriage. The Family Court awards $200k to Ken. The Family Court is not interested that the money was a gift from Joanne’s Mum and Dad.

Example 2. Smart Parents

Mum and Dad lend $400,000 to their daughter, Joanne. Joanne signs a legally prepared Loan Agreement. Joanne purchases a house with the money. She marries Ken. Ten years later they divorce. The house is still worth $400,000. It is the only asset. The Family Court is shown the Loan Agreement. The Family Court orders that Ken gets nothing. This is because the assets of the marriage are nil.

To protect your loan we arrange for a national law firm to prepare loan agreements that comply with the Family Court.

Homemade loan agreements may not work. They carry less weight with the Family Court and Bankruptcy Court. Why take the risk?

But I love my children!

There is nothing wrong with helping your children financially. It could be for their first car, grandchildren school fees, a holiday or a property.

But protect the money in case:

  • they divorce
  • go bankrupt
  • suffer from drugs
  • afflicted with a mental condition
  • stop loving you
  • you run out of money yourself, in your old age

Should you be documenting loans to children?

Never ‘give’ your children money. Always ‘lend’ them money ‘payable on demand’. Get it back if something goes wrong.

A loan isn’t always for property and the grandchildren’s school fees. You can also fund the children’s Superannuation fund.

But don’t do this without getting financial advice, make sure you speak to me about this beforehand!

At different times, it is common to benefit one child over another with money.

If you benefit one child over another then it should be adjusted automatically at the time of your death to avoid problems. For example, let’s say you lend one child $500k and the other child $300k then that is adjusted at your death by paying the second child an additional $200k. So it is all fair again.

When making loans to children:

  • talk with all your children together about the loans
  • never gift children money – only loan them money (this protects both you and them)
  • don’t rely on home-made loans or IOUs – let us arrange a legally prepared Loan Agreement through a law firm

In a Family Trust, the parents will often distribute income to the children to take advantage of their low rates of tax.

The children almost never see the money if it is not used to maintain them.

Instead, generally, ‘they’ loan it back to the Family Trust – this is called an Unpaid Present Entitlement (UPE).

But, sadly, at any time after they reach 18 years of age, the child can ask for the money and if accumulated since they were born can amount to a financially crippling sum!

We can arrange Deeds of Debt Forgiveness to remove this potential problem and the good news is that there are no taxation consequences.

Therefore, if you find yourself in a situation where you want to offer your family members some form of financial assistance then make sure we have a chat beforehand – it will save you in the long run.

Have a great day!

Chris Beks

Business Development Specialist - Ceebeks Business Solutions for GOOD

I love business and the ability to change people’s lives through them!

At Ceebeks Business Solutions for GOOD, we get up every morning to positively impact young families in business by making their businesses REALLY work so that we all make an even bigger impact together. The rewards that bring allow our team ('the fantastic five') to make small but powerful contributions to impact our local community, our country and the lives of those less fortunate around the world.

You see, something quite remarkable happens when we work together, for example, the gift of water is made when we prepare a tax return, the gift of a goat is provided when we help a new business start-up, the gift of shelter is forwarded when we organise a home loan. When we work together, we actually change the world!

I am a business development specialist with nearly 40 years’ experience, a CPA, an authorised representative of Avana Financial Solutions Ltd (Authorised Representative no. 231937) and a credit representative of Outsource Financial Pty Ltd (Authorised Representative no 396061). I have recently co-authored an International Best-Selling Book 'Legacy - The Sustainable Development Goals in Action' and in 2020 published my first book - 'Chasing the Dream! - How to Grow a Business in these Amazing Times', host a daily blog/vlog on our small business Facebook community group page 'Chasing the Dream, and with our Team run a monthly event for small business owners called 'The Chasers Meet-Up', where a guest speaker presents a topic and tips and strategies are openly shared.

In 2015, our business won the Change GPS International Member Firm of the Year and in that same year, I was a founding member of the Global Accounting Movement - Accountants for Good. We were recognised in 2016 by Steve Pipe in his international publication - The World's Most Inspiring Accountants and Featured in "The LinkedIn PlayBook" by world-renowned social media strategist and consultant, Adam Houlahan. In 2017, we were in the Top 25 Most Popular Accounting and Tax Services Award for search4accountants, B1G1 Business for Good Top 100 Giving Businesses in the World and a Semi-Finalist in the 2017 Victorian Regional Achievement and Community Awards. In 2018, we were an Australian Accounting Awards Finalist in "Community Engagement Program of the Year", a Semi-Finalist in the Victorian Regional Achievement and Community Awards 'South West TAFE & Deakin University South West Regional Achiever Award', a Nominee in the Victorian Regional Achievement and Community Awards 'Regional Development Victoria Business Achiever Award', and featured in the Top 25 Most Popular Accounting and Tax Services Award by search4accountants.

Ceebeks Business Solutions for GOOD