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Regulation Required of the Mum and Dad Bank

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Although Australian statistics are in short supply, there is no doubt that the Mum and Dad Bank is big, and getting bigger.

In the UK, lending by parents to children exceeds £6 billion, which means that the Bank of Mum and Dad is the ninth biggest in the UK.

The pandemic is impacting significantly on the trend/need for parents to financially support their children, some of whom are urging for the early release of their inheritance to cover everything, from general living expenses and mortgage repayments, to private school fees and holidays.

The danger of informality

Too often funds are advanced with no written record or even a clear understanding of the terms of the advance:

  • Is it a gift?
  • Is it a loan?
  • Does it bear interest?
  • When is it to be repaid?
  • Is it to be secured?
  • Is it to be taken into account on the distribution of the parents’ estate?

Scenario 1

A son and daughter both receive “advances” from Mum some years before her passing. Nothing was documented. The executor of Mum’s will has to deal with one sibling alleging the funds he/she received were a gift, but what the other sibling received was most definitely a loan and therefore has to be repaid to the estate.

Scenario 2

Monies advanced as in scenario 1, but one sibling signed an acknowledgement of debt. However, as the acknowledgement was more than six years old and no payments referable to it had been made, recovery by the estate was statute barred. (If the acknowledgement of debt had been by deed, the barring of it would not arise until after 12 years).

Many variations on this theme arise. Understandably, they usually play against having a “happy family” situation on the passing of the surviving parent.

Solutions

Properly crafted and appropriate documentation is the key to addressing misunderstandings and injustices within a family. Lending, not giving is often appropriate, especially if a child’s marriage is shaky.

Too much generosity can also be a parent’s regret.

So, an “application” for borrowing from the Mum and Dad Bank requires careful consideration from many perspectives, followed by appropriate documentation.

For advice on how to minimise the negative fallout from this increasingly common “application,” contact our estate planning team by telephone on (07) 3221 9744 or visit our website to get started online.

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