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If you are currently providing, or planning to provide, financial assistance to your children, it is essential to consider how best to structure these funds – either by gift or loan – and how this decision ties in with your broader estate planning strategy.
Gift vs loan arrangements can each have pros and cons when it comes to your estate planning. Depending on your family structure and the circumstances of beneficiaries and/or eligible persons, there are specific reasons why we may or may not want to use a gift vs a loan. For example:
- Gift arrangements are simple, and can have the practical effect of moving the gifted asset outside of the realms of the estate of the parents (which can be helpful in certain circumstances). However, gifts are exposed to asset protection issues for the child, which is often a major concern for parents. We are seeing this as an especially big concern from a family law point of view, with parents having growing concerns about what will happen if there’s a breakdown in the child’s relationship.
- Loan arrangements can (in certain circumstances) offer protection from an asset protection point of view and can also assist in tying things in with your estate plan. However, they can also add sometimes unnecessary complexity to an estate plan. It is important to consider certain risk factors and how a loan should be structured and that it’s properly documented, to achieve any form of asset protection.
There are several complex legal principles, such as the presumption of advancement, which come into play in this area, particularly around the reasons how and why loans must be documented in writing.
We strongly recommend that where you’re considering providing funds to your adult children during your lifetime, you seek advice around how this should be structured and documented to avoid the funds ending up with third parties or otherwise potential disputes or unintended taxes upon your death.
If you would like more information regarding the above or wish to discuss your personal circumstances in more detail, please contact our Estate Planning team on (02) 4927 2900.