How to make sure binding financial agreements between parents and kids are done right

Property-based agreements are soaring as millions of older Australians want to protect money handed over to adult children to buy a home. Here’s how to do it properly.

Property-based ‘prenup’ agreements are soaring in popularity

Property-based ‘prenup’ agreements are soaring in popularity as millions of older Australians want to protect the money they hand over to adult children who are buying a home.

But do such loan arrangements work?

With house prices averaging more than $1m in many suburbs, a recent survey from UBS Investment bank found that amounts of more than $200,000 are now commonly being transferred to home purchasers from parents.

With no off-the-shelf product to access, many families are seeking to draw up tailored agreements with family members that are designed for ‘asset protection.’

In most cases, these Binding Financial Agreements (BFAs) aim to retain the property within the family circle – or to put it another way, they aim to make sure if there is a divorce, the partner of the adult child does not walk away with half the asset value.

Financial advisers suggest the outstanding objective of these ‘prenups’ is to ensure a loan has taken place and it needs to be repaid.

“You have got to be very careful to make sure that both parties, your child and their spouse understand it is a genuine loan and maybe one day you will call up on it,” said adviser Stuart Wemyss of Prosolution Private Clients.

“You want a watertight way of ensuring that capital is protected.”

The UBS survey suggests that 40 per cent of all Australians are in some way involved with the Bank of Mum and Dad – and that mortgage arrangements dominate financial transactions.

In reality, the crux of the issue is whether parents will be prepared to draft official loan agreements with their adult children. And if this is achieved, whether those adult children will stick to the agreement.

The issue has sparked a debate on The Australian’s Money Puzzle podcast with listener ‘Charles’ suggesting: “If the money is given as a gift it becomes part of the couples’ main assets and may be divided accordingly – however if it is documented properly as a loan with commercial terms it remains a liability to others – reducing the risk of it ever being included in a property settlement.”

Legal group Lynn and Brown says the Binding Financial Agreement “allows a couple to agree in advance on an acceptable division of assets … Binding Financial Agreements can be entered into before the commencement of a marriage or relationship or at any point during the marriage or relationship and even after separation.”

Money Puzzle podcast listeners appear pleased they took legal action as part of financial arrangements.“Twenty years ago we loaned money to our daughter and her husband when they were buying their first home,” says listener Billy. “At the time, we did draw up a loan agreement and had all parties sign it. The reason we did it was from the point of view of asset protection against the remote possibility that the marriage could end up in the divorce courts.

“We hoped that this loan agreement would give us a way to take our money back off the table, rather than seeing the money we had loaned being split between the divorcing couple, with half going to the ex-husband.

“I don’t know if our loan agreement would have held up in court. We never needed it.’

If BFAs have failed to protect the Bank of Mum and Dad we have yet to hear about it.

Unfortunately, there is no central register of BFAs so an accurate picture of the legal work in this area – or its effectiveness – is difficult to establish.

Originally published as How to make sure binding financial agreements between parents and kids are done right