Gift or Loan from Parents

Think asset protection upon bankruptcy, death, incapacity and family law.

A loan is usually better – doesn’t need to be at an interest ate.

Neither gifts or loan proceeds are taxable.

I don’t understand why you think this would be taxable?

Here is an article that i wrote

Parents Helping Adult Children

Many parents want to help their (adult) children financially. The common way they do this is to just either hand over a large sum of cash (or bank transfer).

There are 3 main issues to consider before doing this:

Bankruptcy of either parent or child

death of either

divorce/separation of the child

If the child ends up bankrupt the parent then argues that the money they transferred was really a loan. But there is no evidence of an agreement. There is also no security taken, so if the parent did lend the money to the child at best they would be an unsecured creditor.

Of course if the parent were to go bankrupt it would have been better that the money was a gift. In this case planning which parent lends or gifts can be important – perhaps the parent least at risk would be the better choice.

If the parent dies other family members may argue that the transaction was a loan. the executor may need to sue the child to recover the money so it can be passed via the will. If the child dies then the parent’s money may go via the child’s will to others – perhaps the spouse who could then remarry. You want some control. You also want to avoid costly legal fees if there is a legal argument of gift v loan.

Often when the child’s relationship breaks down the parents will claim the money was a loan and try to recover it. This is to reduce the chances of the money ending up with the spouse in the property settlement. Naturally the family courts are suspicious of these sudden ‘loans’ unless there is evidence.

Solution – decide before transferring if the transaction is a loan or a gift and document it either way. If it is a loan consider taking security – a second mortgage for example. You will then be a secured creditor.

http://www.Terryw.com.au