Loans in Lieu of bequests – not necessarily a great idea

We have all heard stories of parents providing financial assistance to their children during their lifetime, rather than waiting for them to inherit – this could include helping with a deposit for the purchase of a house, helping to pay a housing loan or (as is more often the case) grandchildren’s private school fees. This can create problems for them and for their children.

These gifts may create unintended income tax or capital gains tax liabilities for the parents

In some cases parents decide to exclude some of their children from a gift or transfer control of a family business to one or more children, to the exclusion of other siblings.

The consequence of these actions can be that the siblings who missed out on a particular gift make a family provision claim on their parents’ estate. The likelihood of such a claim succeeding can be minimised if appropriate estate planning strategies are put in effect at the time the gift is made.

Often parents who pay the deposit for the purchase of a property for their son or daughter, or pay the balance of their mortgage, only for the the child’s relationship to breaks down and the ex-partner successfully claim half of the home purchased with the gift of the parents. Or the business that they had spent years building up is claimed by creditors when the business fails.

In the instance that a parent wishes to pay the deposit for their children’s home, or their mortgage, they should obtain appropriate legal and financial advice in order to structure the transaction as a secured loan, making it less likely that the gift will end up in an ex partner or creditors hands.

It is important that parents minimise the problems that can arise by having appropriate documentation drafted. As an experienced practitioner in family provision claims has told me – if you hope to avoid a claim by your loved ones make sure you divide your estate evenly. If you give money prior to dying document it to protect the gifts being lost through relationship break down or due to impecunious business practices.