Have You Properly Documented Loans to Your Children? Why It Matters More Than You Think

Financial assistance from parents to children is common—but failing to properly document these arrangements can lead to significant legal, tax, and estate complications down the track.

In the eyes of the law, there’s a big difference between a gift and a loan—and if you’re not clear about your intentions or lack the right paperwork, courts may not be on your side.

Family Loans and Estate Planning: A Common Trap

Whether you intend to be repaid or not, how you document financial advances to children or family members can dramatically affect:

• What happens in the event of your passing
• How your estate is distributed
• Whether funds can be recovered or are lost entirely

The legal presumptions surrounding gifts and loans are complex, especially in family law and estate litigation. Without the right documents, your wishes may not be enforceable—and disputes can quickly arise between siblings or beneficiaries.

Why DIY Loan Agreements Often Don’t Work

A simple written note or informal conversation is rarely enough. Courts look for specific indicators of intent, enforceability, and evidence over time. Interest, repayment terms, and security are just some of the things that must be considered if you want the arrangement to hold up.

What Happens If the Lender Dies?

If you’re a parent helping out a child, what happens to that “loan” after you pass away? Will it be forgiven? Deducted from their inheritance? Or must it be repaid to your estate? The answer depends entirely on how the arrangement is structured—and whether your Will or other documents are aligned.

Key Considerations Include:

• The tax treatment of loans vs gifts
• Centrelink implications
• Whether the loan affects other beneficiaries
• Asset protection and family law consequences

Avoid Family Disputes Later by Taking Action Now

If you’ve advanced money to your children—or plan to—it’s essential to get legal advice on how best to structure and document the arrangement. Poorly drafted or undocumented loans can lead to disputes, tax problems, and unfair outcomes in your estate.

Real-World Scenarios: What Can Go Wrong?

Here are just a few examples of how informal or undocumented loans can create issues:

• A parent lends their child $200,000 to help with a home deposit. No loan agreement is signed. Years later, the parent passes away, and that child argues that the money was a gift at the detriment of their other siblings. The estate is thrown into dispute.
• A family loan is documented, but the Will says nothing about whether it should be repaid. The executor is uncertain whether to call in the loan or forgive it—leading to unnecessary delays and conflict among beneficiaries.
• A parent provides a significant sum of money, which is later caught up in their child’s divorce proceedings. Without proper documentation or security, the family’s wealth becomes vulnerable.

FAQs About Family Loans and Estate Planning

Q: What if I trust my child and don’t expect repayment?
Even if you intend the money as a gift, it’s important to clarify that in writing. Otherwise, confusion or legal challenges may arise later.

Q: Can I forgive a loan in my Will?
Yes, but it must be clearly expressed in your Will to be effective. Otherwise, the executor may be obligated to collect the loan.

Q: What if my child says the money was a gift, but I disagree?
Courts rely on evidence. A formal loan agreement or even a statutory declaration from the time of the advance can be critical.

Secure Your Intentions with Expert Legal Support

At our firm, we’ve helped countless families document loans, gifts, and estate intentions with clarity and legal certainty. Whether you’re lending money now or updating your Will, we can help safeguard your intentions and minimise family conflict.