Lending your kids money? This could save you from going to court

Around Australia, many family lawyers are on a delicate mission: helping parents and grandparents navigate how to help loved ones financially while still protecting their assets if there’s a break-up.

It’s becoming an increasingly common query from clients of a certain age, who want to subsidise their child or grandchild but also keep assets in the family if a relationship ends.

Asking your children and their partners to sign a legal document could be awkward, but it can save you headaches down the track.Credit: Getty Images

It’s a fraught issue as Australia experiences an era of massive intergenerational wealth transfer, with an estimated $3.5 trillion in assets expected to be passed on by 2050.

There are three main options when transferring wealth: a gift (which offers little to no legal protection), a loan (which can be contested, especially if not properly documented) or the most robust legal option, the Binding Financial Agreement (BFA).

A decade ago, it was unusual to request a BFA for family wealth transfer. Now, many parents won’t extend money to their children unless they and their partner enter into a binding agreement.

What is a BFA?

BFAs are powerful legal tools that can protect financial contributions when you hand over wealth (whether early inheritance, money for a home deposit or other financial support). They allow all parties to define in legal terms how specific assets will be treated in the event of separation.

They are enforceable under the Family Law Act and allow parties to contract out of the usual rules surrounding division of property. This is particularly useful in blended families, second or subsequent marriages, or when significant family wealth is involved.

A BFA must be signed with independent legal advice on both sides, which offers an extra layer of fairness, clarity and enforceability. But they are not without complications. Any situation where a legal document intersects with love, family and money should be approached with careful thought and expert advice.

How could I use a BFA?

Aside from your Westpacs or NABs, the bank of mum and dad or bank of granny and pa are big players in helping young Australians enter the property market.

Such well-meaning gifts or loans can have unintended consequences, especially if a couple receiving this financial support separates and the gift or loan is entangled in a property settlement.

Families often believe they are lending, not gifting, money to their children or grandchildren, but without clear records and legal structure the courts may not agree.

Consider the case of Toby and Mia. Toby’s parents contributed $500,000 towards a first home purchase, intended as a loan. They were not comfortable creating a formal repayment schedule or loan agreement, keeping it as a “family understanding”.

When Toby and Mia’s relationship ended years later, the lack of documentation meant the parental contribution was treated by the courts as a gift and included in the pool of assets available for division between the couple.

There is a risk of relationship damage if one party feels pressured into signing.

This is a common outcome.

Many informal family loans are never recorded or legally structured, and I’ve seen first-hand how disputes over such loans/gifts can cause immense financial and emotional strain and lead to the breakdown of family relationships.

A well-drafted BFA can clearly define who owns what and ensure that a contribution is not lost in a break-up. It can explicitly exclude certain assets from any future property settlement and is harder (though not impossible) to contest in court.

Are they always the best idea?

With the growing popularity of BFAs, I expect to see more court challenges to them in the future. Unless your BFA is objectively fair and reasonable, it risks being overturned in court, especially if there is evidence of coercion, inadequate disclosure or lack of legal advice.

An overly one-sided BFA is not worth the paper it’s written on. The courts can and do set them aside. In one case, Thorne v Kennedy, the High Court did just that.

There is also a risk of relationship damage if one party feels pressured into signing. With couples, sometimes the implication that one party is protecting themselves “just in case” can lead to resentment and mistrust. This makes honest conversations essential.

The bottom line in working out whether a BFA is right for you is: are you prepared to be sharing that asset with the other party if there is a split?

If you are comfortable with this, or you are concerned about upsetting family dynamics by requesting a BFA, you may prefer to gift. It’s your choice to weigh up how much control you want over that asset as you pass it to the next generation.

If you want to keep that asset in the family, a BFA provides solid legal protection, although there are other options.

James Steel is a family law specialist and principal at national law firm Barry Nilsson, and a nationally accredited mediator.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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