Family Loans: Helping Your Children Buy Property Without Creating Problems Later

For many families, helping a child purchase their first home or investment property is a natural part of building and transferring family wealth. 

That assistance may be $50,000.00 towards a deposit, several hundred thousand dollars to reduce bank borrowings, or even the entire purchase price. 

The difficulty is that what begins as a straightforward family arrangement can become considerably more complicated years later. 

Was the money a gift or a loan? Does it have to be repaid? What happens if the child separates from their partner? What happens if the parent dies? Should one child receive less from the estate because they received financial assistance during the parent's lifetime? 

These questions are much easier to address when the money is advanced than when a dispute has already arisen. 

Gift or loan? 

The first question should be simple: What do the parties actually intend? 

If parents intend to give their daughter $500,000.00 permanently, the arrangement should be documented consistently with that intention. 

If they expect the $500,000.00 to be repaid, it should ordinarily be documented as a loan. 

Calling an advance a "loan" within the family does not necessarily resolve all of the issues if there are no agreed loan repayment terms and everyone behaves as though repayment will never be required. 

Example 

Parents advance $800,000.00 to their son and his partner to purchase a $2.5 million home. 

Nothing is documented because everyone gets along. 

Eight years later, the son separates from his partner. The parents say the $800,000.00 was always a loan. The former partner says it was a gift to help the couple purchase their home. 

The problem is no longer simply whether the parents should have prepared a loan agreement eight years earlier. It is now a dispute about what was intended eight years earlier. 

A properly documented arrangement can provide much greater clarity. 

A family loan does not need to operate like a bank loan 

Parents sometimes resist documenting a loan because they do not want to impose commercial repayment obligations on their children. 

Those are separate issues. 

A family loan can be drafted flexibly. Depending on the family's objectives, it might be: 

• interest-free; 

• repayable only on the sale of the property; 

• repayable after a specified period; 

• repayable following a particular event; 

• repayable on demand; or 

• repayable following the death of the lender. 

The important point is that the family decides what the arrangement is intended to achieve and documents it accordingly. 

Example 

A mother lends her daughter $400,000.00 towards the purchase of a home. 

She does not require monthly repayments and does not want to charge interest. Her principal concern is preserving the $400,000.00 as part of the family's wealth. 

The loan agreement could provide that no regular repayments are required, but the loan becomes repayable if the property is sold, after a specified period, or following another agreed trigger. 

That is very different from simply transferring $400,000.00 and leaving everyone to determine its legal character later. 

Should the loan be secured? 

Another question is whether the family requires security. 

A formal loan agreement records the debt. Security provides additional protection for the lender if the borrower cannot or does not repay it. 

Whether security is appropriate will depend on the amount involved, existing bank financing, the property and the broader family circumstances. There may also be practical issues where a bank already holds a first mortgage. 

For substantial advances, this question should be considered rather than assumed away merely because the lender and borrower are related. 

What happens when the parent dies? 

Family loans should also be considered as part of estate planning. 

Suppose a father has three children and has lent one of them $1,000,000.00. 

His Will leaves his estate equally between all three children. 

Does he intend the $1,000,000.00 loan to remain repayable to his estate? Is it to be forgiven? Is it to be taken into account when dividing the estate? 

There is no universal answer. 

The important point is that the loan arrangements and the Will should not be considered independently. 

Example 

A parent has an estate of $8 million and three children. 

During the parent's lifetime: 

• Child A received a $700,000.00 loan; 

• Child B received no substantial financial assistance; and 

• Child C received no substantial financial assistance. 

If the parent's Will simply divides the estate equally, the family still needs to know what is intended to happen to Child A's $700,000.00 debt. 

Different answers can produce very different economic outcomes between the children. 

Family wealth should be considered as a whole 

The larger the amount being advanced, the less useful it is to view the transaction as simply "helping the children with a deposit". 

It may form part of a much broader strategy involving: 

• asset protection; 

• estate and succession planning; 

• equality or fairness between children; 

• ownership of family assets; 

• taxation; 

• superannuation; 

• trusts and companies; and 

• the long-term transfer of wealth between generations. 

Legal advice should also be coordinated with accounting, taxation and financial advice where those issues are relevant. 

Start with clarity 

Families are often reluctant to document arrangements because they trust each other. 

Proper documentation is not inconsistent with trust. 

In many cases, it protects family relationships by ensuring that everyone understands the arrangement from the beginning. 

The best time to determine whether money is a gift or a loan, when it is repayable and how it fits within the family's broader estate plan is before the money is advanced — not years later when circumstances have changed. 

At KCT Legal, we advise individuals and family groups on family lending arrangements, property transactions, asset protection and estate and succession planning. For families with more complex structures or significant assets, we work with their accountants, tax advisers and financial advisers to ensure that individual transactions form part of a cohesive broader strategy. 

This article provides general information only and does not constitute legal, taxation, financial or family law advice. The appropriate structure and documentation will depend on the particular circumstances. Specific professional advice should be obtained before acting or relying on this information.