How about a royal commission into the ‘Bank of Mum and Dad’?
At a whopping $65.3 billion, it is apparently the fifth-largest lender in the country behind the Big Four banks. Yet, the BOMAD sector, the Bank of Mum and Dad, seemed to get very little attention at the recent royal commission into the banking industry.
In some ways that’s odd because, along with the notorious ‘low doc’ loans of the more marginal financial institutions out there, the BOMAD is even worse, being, essentially, a ‘no docs’ business.
Mums and dads have been providing financial assistance to their children since Methuselah. In recent times, the largesse has grown and grown mostly to assist in the deposit for a child’s first home. There can be all sorts of other reasons that parents want to, and do, help. It can be to prop up a child’s failing or start-up business, provide personal guarantees or even meet tax obligations. In most cases, their customers/children would be fairly described as ‘distressed borrowers’, to use the banking parlance. What is remarkable is that two thirds of parents dip into their savings, usually in retirement, to supply the booty. Ironically, they can then become distressed lenders.
Yet, given the fragility of their customers and the uncertain future needs of the parents, it is remarkable how many parental providers give no thought to the longer-term implications of their generosity. Here are just a few:
It is probably anathema to say to a parent – get that deal with your son or daughter in writing! – because, after all, they’re flesh and blood and you trust ’em. With a handshake in one hand and a cheque in the other, the deal is done over a few sips of soy chai latte.
Then, what do you know, things turn pear shape and the BOMAD want, or need their money back. Oh dear, what was the deal again? Looks like we’re off to court for it to work out what the terms of the deal were. The court is then left with that enviable task of sifting through all the ‘he said’, ‘she said’ evidence. Don’t believe this could happen? Just as an example, type ‘Berghan v Berghan’ in your next web browsing session and have a read.
This basic question is pregnant with legal significance and, in many cases, the answer can depend on who’s asking the question. Parents often try to re-categorise the arrangement to fit the circumstances.
Parents often advance money to their son and daughter in law (or vice versa). If that couple subsequently end up in matrimonial proceedings, what is the legal status of the money advanced by the parents, you may ask. The son would no doubt argue it was a loan that needs to be repaid to his parents as part of the matrimonial property settlement. The daughter-in-law would no doubt say it was a gift that does not have to be repaid. What happens then? See answer in 1. above.
Parents also advance money to children to buy their first home. This is usually over and above what the children have to borrow from a bank. Invariably the bank will ask what the arrangement is with your parents in relation to the money they have provided. The bank is usually told it was a gift. That may not be the truth but it helps to get the loan. Of course when, as often happens, the parents ask for it back from their child, they are left with the unfortunate answer they gave to the bank so many years ago.
A little law can have big consequences in the area of parental loans. Most of these loans are on the basis that they are repayable ‘on demand’ i.e. whenever the parents ask for it back. The trouble with that is the law of time limitations. In relation to such loans, the law says there is a six-year time limit to sue to legally recover the loan before you are what is called ‘statute barred’ from doing so. Here’s the rub – that time limit starts ticking from when the loan was made, not from when the demand is made.
In so many cases, parents come calling for repayment well and truly after they originally lent the money and the law can prevent them from getting it back because they’re too late.
If you’re on Age Pension and you give money to someone Centrelink may say you still have the money. It’s called a ‘Clayton’s gift’. There are limits to how much you can give away without affecting your pension and knowing these rules is crucial to ensure you don’t have your pension reduced or, even worse, lost.
If you have given or lent money to children, do you need to consider the effect of that on what you give them in your will? This is a festering issue out there given the amount of financial assistance parents are providing.
This is a particular problem where parents provide differing amounts to their children. Should the amounts be offset against the children’s entitlements under the will or if they were loans, should those loans be forgiven in the will?
So many parents give away things without considering whether they just might need the money for later life purposes such as aged care. Asking for it back comes with lots of problems, especially if there is a dispute about whether you are entitled to be repaid and whether your child has the capacity to do so in any event.
These are just some of the dollops of issues we pour into the cauldron of parental financing. Unless they are confronted up front, they will lead invariably to the breakdown of family relationships and ultimate implosion. I know this because I see it in my work all the time.
You can accept what I say and do something about it or cross your fingers that none of these scenarios will happen in your life or to your family. I am happy to take bets that it will, if you are not more business-like in dealing with your children and the finances.
Maybe we need a royal commission, not to stop or better regulate parent financing but simply to raise our consciousness about the perils.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.