With bank interest rates currently being high many people will be encountering requests from family and friends to loan them money for things like business ventures and property purchases. It is important when considering these requests that you protect your own assets and make informed decisions.

A key decision to make is whether the request, for example, to aid your child to purchase their first property, will be done by way of a loan or a gift.  Both options have very different outcomes, so you should consider your wider cash and other asset reserves to make the best decision for your personal situation. 

Once you have decided whether it will be done as a gift or loan, is important that you correctly record the lending or gift through a loan agreement or deed of gift. No matter how quickly funds are required by your child or other borrower, it is important to set aside urgency, consider any risks, and take advice. Your lawyer and other professional advisors will be able to assist you through the process.

Loan Agreement

A loan means the money will be required to be paid back by the borrower.

If you choose to loan money to somebody, this is generally recorded in a Loan Agreement, or Deed of Acknowledgement of Debt. Loan agreements set out the key terms of the loan, which can include the rights and obligations of both the lenders and borrowers, schedule of payments, and the interest rate you will be charging.

It is important to note that sometimes charging a very low interest rate, or no interest, on a loan can be an issue if you apply for a rest home subsidy in the future, as this can be seen as ‘deprivation of assets’.  It is important to take legal advice about this.

You may also wish to include a right for you to register a second mortgage or caveat on the title to the borrower’s property, if you are concerned the property could be sold before you are repaid the loan.

Both a mortgage and a caveat prevent any sale or transfer of the relevant property until the loan is repaid. The caveat option is more commonly used than registering a second mortgage, as it is generally a simpler process, and hence a more cost-effective means of protecting your interest.

Clearly-drafted loan agreements not only protect you and your rights, but also ensure that both parties know what is expected of them.

Deed of Gift

A gift is not expected to be repaid.

Deeds of Gift are most appropriate if you would like to give the person a gift, often seen to be an advance on what would otherwise be their inheritance in the case of children.

Gifts are generally recorded in a Deed of Gift.  Sometimes if there is a bank involved, they will have a set document to be signed recording the gift, but it pays to take legal advice before signing such documents, as they need to line up with your intentions.

Importantly, a gift will influence your ability to receive a rest home subsidy in the future if it is over $27,000 as that is considered to ‘deprivation of assets’.  There is a lower threshold if the gift is made in the 5 year period leading up to going into residential care.  It is important to take legal advice about this.

If the gift is to be considered as an advance on your child’s inheritance, we recommend also documenting this in your Will so this can be considered relative to your other children as well, if relevant.

You may also wish to consider any relationship property issues that may arise for your child when making the gift. For example, in the event of your child separating from their partner, half the value of the gift may potentially go to their partner.

To prevent this we often recommend encouraging your child to enter into a Relationship Property Agreement (also known as a Contracting Out Agreement) with their partner to record the gift you are giving as separate property, meaning it remains the property of your child, and not the partner, if they separate.

Supporting your children or others with financial gifts can be a difficult process to navigate. We recommend seeking independent legal and other professional advice tailored to your situation before committing to any gift or loan.

Claire Tyler

Rainey Collins Lawyers

Wellington

lawyers@raineycollins.co.nz

 

Please note that Rainey Collins is not contracted to provide Legal Aid, other than in the Treaty of Waitangi area.  We therefore are unable to take on any Civil or Family Legal Aid work. If you require Legal Aid in those areas, you can search the list of Legal Aid lawyers on the Ministry of Justice website.