When family members help each other out financially, little thought is usually given at the time as to whether the help is a gift or a loan. Even less consideration is given to documenting the arrangement. From the perspective of asset protection or ensuring that beneficiaries are all treated equally when you pass away, the distinction can be a very important one!

One common issue is where you help your adult child financially with the deposit on their first property, and that child is in a committed relationship. What happens when that child’s personal relationship fails and the exiting partner wants half of all of the assets created during the relationship? How can you prevent 50% of the asset going out the door with the ex partner?

Another common scenario is where parents help their children out unequally, or give the help at different stages in their childrens’ lives when the value of the help reflects the prevailing financial environment, or give help to some children but not all? Many expensive estate disputes and breakdowns in family relationships between siblings can be avoided if timely consideration is given to determining the nature of the financial support (gift or loan) at the time it is made, and documenting this intention in writing.

If the financial support is in the form of a loan, there are good reasons to make sure there is a proper loan agreement in place, with all of the hallmarks of a commercial loan agreement.