How to Help Your Children with Money
Parents often want to support their children, especially when it comes to big milestones like buying a home. But there are some important things to consider before diving in.
The "Bank of Mum and Dad"
This has become a significant player in the property market, providing billions of dollars to adult children for buying homes. Many parents feel the pressure to help financially, but it's essential to think carefully about how to do it.
Parents may feel guilty or responsible for the high cost of housing and may be tempted to provide financial assistance. However, it's crucial to consider the potential risks and consequences.
Financial support from parents can sometimes lead to misunderstandings or even financial abuse. It's essential to establish clear boundaries and agreements to protect both parties.
Gifts vs. Loans
Consider whether the support will be given as a gift or a loan. While gifts are tax-free and can be straightforward, loans provide legal protection and ensure that the money remains within the family.
We strongly advise that you NEVER gift money to your children. This is because if they get a divorce, they could lose that money. Instead, you should loan the money via a formal loan agreement, which we can arrange for you.
This does not mean you have to ask for repayments. It can be what we call a "soft loan" where you can choose whether to call or not recall the loan including the interest charged.
This protects ts the money you have lent to y our children in the event of a divorce because the family court will offset your debt against the asset. You can read about more about this here.
Guarantees
Becoming a guarantor for a loan carries risks, so it's essential to understand the potential consequences if things go wrong. Limiting liability and considering worst-case scenarios can help mitigate risks. .
Investing in Businesses
If children seek investment for a business venture, approach it as a regular investor would. Request a business plan, set clear expectations, and consider contributing gradually based on milestones.
You must set up a formal loan agreement, to not only protect yourself but also protect your children in the event of a divorce or bankruptcy.
By approaching financial support with caution and clear communication, parents can help their children achieve their goals while protecting their own financial interests.
I hope you enjoyed reading this article. If you would like my team and I to help you, set up the appropriate loan agreements, please contact us for a free no obligation meeting. - Chris Tolevsky