Gifts (or is it a loan) from the bank of Mum and Dad

With house prices steadily rising, it is becoming more common for first home purchasers to receive a loan or gift from their parents to help meet the deposit requirements. As part of this process, we at TODD & WALKER Law are seeing many banks and brokers requiring our client’s parents to sign certificates recording the advance as a gift. Often these certificates are signed before our client’s take legal advice. It is crucial that borrowers and their parents take legal advice prior to signing as the gift certificates can have unintended consequences and once a gift has made, it cannot be undone.

So, what are the unintended consequences? Here are two examples:

• If a child is being advanced funds from their parents, and that child has a partner who is moving into the new house, the partner may be able to claim 50% of the parent’s gift in the event of separation (under relationship property rules). This may be an issue where the parents advanced a substantial sum to their child and the partner may not have contributed any funds to the house purchase. When a separation occurs, the parents will often say “the advance was a loan, not a gift, it has to be paid back” or “it was a gift to my child only, not to my child and their partner” or “it was a conditional gift, meaning it needed to be repaid on separation or the sale of the house”. It is important for the child and their parents to understand that, by signing a gift certificate, the parents have recorded that the funds are a gift, not a loan, and do not ever need to be repaid. This means the funds have become the child’s personal property and could be subject to the equal sharing rules under relationship property legislation.

•  The parents maybe managing how much they gift each year so as to protect their ability to receive the benefit of residential care subsidies in the future. They will only be able to gift a maximum of $27000 a year. It is important for parents to understand that their gifting programme could be potentially undermined if a gift certificate is signed and results in the parents gifting more than $27,000.00 in any given year. If so, the parents will no longer be eligible for residential care subsidies.

 Our recommendation is that clients should always talk to their lawyer before asking their parents to sign a gift certificate, as there may be alternative means to record gifts. For example, most banks will accept a loan agreement (interest free and repayable after the bank loan is repaid) meaning the funds can be called up by the parents if their children separate. A loan arrangement will also not affect the gifting programme.

 If you need any advice as to how best record such arrangements, please contact the Property Law experts at TODD & WALKER Law on 03 4412743 or via enquiries@toddandwalker.com.