The Bank of Mum and Dad: Loans between family, are they legal?
THE BANK OF MUM AND DAD: LOANS BETWEEN FAMILY, ARE THEY LEGAL?
The old (misquoted) adage states blood is thicker than water. Which suggests the bonds of kinship are stronger and dearer than anything else.
Working as a lawyer somewhat cynically dispels this belief that family will overcome all. This is because it is depressingly common to see what started with good faith and good intentions between family members, descends into petty, brutal and prolonged legal arguments.
An issue which arises frequently, and which can blow up like a landmine if not treated carefully, is the issue of loans between family members.
Specifically, the question of whether loans such as these legal? Can you lend or borrow money from a relation? The answer is an unequivocal yes. There is no reason you cannot lend money just because you are related, and the truth is that it happens all the time. This means that if the person who borrowed money defaults, you can take legal action to recover this.
Okay, you might be asking yourself, well how come your article has another ten paragraphs, if your answer is so simple?
Well, because whilst you can enter into loan agreements with family, when it comes to proving these loans later, major difficulties can arise.
Despite what some people may think, the law is now always black and white. It cannot be and still function. Instead, decisions must be made based off assessments of the surrounding circumstances. This means the context, or “flavour” (using the terminology of the Courts), in which a loan is given between family members, and the way it is recorded, are crucial if you wish to recover under it.
For example, if a bank were to loan you $50,000.00, even if you were best friends with the banker, even if you were a lifetime client, no one would doubt this was a commercial transaction. The bank is lending the money on the expectation that it will charge interest and generate a profit. The entire transaction has an inherent and obvious “commercial flavour”.
However, if the same situation is applied to a family scenario, for instance if Mum and Dad lent you $50,000.00, suddenly the flavor is less certain. Are Mum and Dad giving you this money as a gift? Or is it a loan, with an expectation to repay only the principal amount? Or perhaps still, Mum and Dad expect interest in addition to the principle sum?
The point is, family relationships and expectations can dramatically alter what in another context would be clear-cut.
Okay, you fire back, so how do I make sure the “flavour” is such that I can get my money back if my deadbeat son decides to stop paying me?
There is no sure-fire way to do this, but a good place to start is simply to discuss the loan with the people involved, make sure you are all clear on what is offered and what is accepted, and put this in writing, signed by everyone involved.
There are of course other considerations, and this article is not a comprehensive lesson on loan drafting. The key take away, however, is to have written proof. It is all very well and good for your family member to argue there was never an expectation to pay interest, and that the loan was only given for natural love and affection. However, it is hard to maintain this when you produce a signed loan document clearly setting out the terms, frequency and quantum of interest payments.
Family is difficult, and when mixed with money it has the potential to go horribly wrong. But the thing to remember is that just because you are related to someone, does not mean you cannot do business with them. You definitely can lend to, or borrow from, a family member, and as long as you take some measures to protect yourself, you are well on the way to ensuring that an act of business is not misconstrued as an act of love.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.