How do I make a binding loan to my family members?
It is common for families to lend money to each other, particularly parents to their adult children. Stephanie Rendell, Associate Solicitor and Head of the RNG Lawyers Wills & Estates Team, explains some steps to make these loans more enforceable.
This blog post deals with family members lending money to each other, such as parents to adult children and between siblings. The law is different in regards to loans between couples and we recommend that you seek family law advice if you wish to make such a loan.
Prior to the provision of any significant gift or loan to a family member, we strongly recommend that you obtain legal, financial and accounting advice to ensure that you are aware of your options regarding the gift or loan, as well as any taxation or other financial consequences to you (including in regards to existing Centrelink entitlements).
If you are planning to lend money to a family member, an important first consideration is whether you genuinely expect to be repaid the money. If your intention is that the loan should be enforceable, we strongly recommend that the loan be documented by a lawyer to ensure it meets appropriate formality requirements.
Some of the issues that we commonly see in regards to loans between family include:
The loan is not documented at all.
The parties disagree about the terms of the loan arrangement or claim it was a gift.
The loan is documented but does not contain sufficiently certain terms, including terms that would be expected in a Loan Agreement.
The loan term is an extended indefinite period.
The lender is 'out of time' to enforce the loan given the terms of the loan and the conduct of the parties.
The terms of the original loan have not been followed by the parties. For example: the lender has not taken any steps to enforce the loan when the borrower has defaulted in the past.
The loan does not provide for sufficient security given the circumstances.
These issues can be especially complicated if either the lender or the borrower dies or loses capacity before the loan is paid out.
RNG Lawyers has experience drafting Loan Agreements between family members and understands that these loans generally are not the same as commercial loans from third parties (such as banks). We acknowledge that lending money within the family can be sensitive and can help you document your loan in a way to minimise the risk of future disputes and ensure enforceability of the loan in the future.