Stephen*, 59, spends most days visiting his elderly dad in residential aged care. It’s been a challenging transition for his father, Stephen admits. And for the man who once travelled the world and ate at the finest restaurants, with a wine collection so vast it is housed in its own rented cellar, the change to sitting in an armchair overlooking a local park from his second-floor room has taken some getting used to.
But while Stephen has been focused on looking after his dad’s emotional needs, his much younger sibling from his father’s second marriage has had her mind on the financial side of their father’s life – and the prospect of their dad sharing early inheritance money with her to fund her home ownership dream.
She’s in her 30s, with two young children and, like many younger Australians, she’s struggling to save enough money to build up the deposit she needs to buy her own home, just like her two older siblings (including Stephen) already have. Her idea? To draw on the bank account of her father and take an early release on what she knows will eventually be a sizeable inheritance.
Projections in the 2021 Productivity Commission report revealed that baby boomers like Stephen’s father are set to pass an estimated $224 billion each year in inheritance by 2050. And, for many children facing cost-of-living pressures, rising interest rates and issues around lack of housing affordability, the temptation to access these assets while the gifter is still alive is hard to ignore.
Family lawyer and wills specialist Anuja Baker, from Anuja Baker Legal Services, says there are many potential issues to consider first. Ignoring them, she says, can lead to resentments that can tear families apart. And with undue pressure into giving or lending money leaning into the issue of financial elder abuse, many parents feel powerless to say ‘no’ to their adult children’s requests for large sums of money – even when it puts their own secure financial future at risk.
“When I am acting for ‘early inheritance’ mums and dads who want to give their children access to money to either pay their deposit or fund their entire first home purchase, I encourage my clients to enter into a formal loan agreement, to ensure they have the proper protection they need,” she says.
Treating the bank of mum and dad with the same respect and legal protection as any traditional lender would expect means the deal is thoroughly documented and understood by everyone involved – a critical legal step that creates a safety net should things end up going wrong.
And things going wrong, according to Ms Baker, can and does happen. When the marriage or relationship between an adult child and their partner breaks down and leads to a legal separation of assets, parents who have funded the purchase of a home that was shared by the once happy couple shouldn’t feel anxious about losing their gift.
By having a formal loan agreement to document the deal between parents and their adult children – even if, Ms Baker says, the loan agreement outlines a tokenistic minimal ongoing repayment rate – parents are recognised as the official lenders. And this means the way the property is settled between the younger couple separating reflects that significant financial interest.
And for other siblings who may be harbouring worries about equity when they see adult parents give substantial sums of money to one or two of their siblings, even if they did not receive such a monetary gift themselves, the creation of a loan agreement is a record of the transaction.
The creation of a will and management of estate planning must also reflect the loan agreement, says Ms Baker. In doing so, parents can state in their will that they absolve their adult child of further repayments of the loan, or can outline that this loan needs to be settled before other equitable distributions of the overall estate can be made to other beneficiaries. Lodging a caveat on the property connected to the loan agreement offers further protection for everyone involved.
For Stephen, whose own mortgage is still far from paid off, the prospect of his younger sibling taking money from the estate while their dad is still very much alive is proving to be a familial minefield. Although he understands the financial pressure people entering today’s property market face, he is concerned by his sister’s cavalier attitude to documenting the gift she is hoping to receive – a concern that has led to meetings with his other sibling, who shares similar worries.
“We still have a mortgage and a child at high school – and we are not rich,” Stephen says. “I get that my sister could benefit from getting money from dad’s estate now. But we just need to legally document it all, so, when dad does eventually pass and the estate is divided, it is divided in a way that reflects the huge amount of his money she wants to take out of it now.”
The bank of mum and dad is one of Australia’s busiest lenders
According to recent statistics, the bank of mum and dad currently ranks among the top 10 lenders in Australia, as first home buyers face growing costs to borrow money from traditional lenders. The recent interest rate hike – the 12th since May 2022 – and the prediction that yet more rate rises are coming, is making the situation even more stressful for many young buyers desperate to get their foot on the property ladder.
Ms Baker says her workload in recent years has reflected the popularity of what she calls mum and dad loans.
“It can work very well, but it needs to be documented and treated with the same care as any formal loan arrangement,” she says. “But it’s never positive if parents feel pressured, when it puts their own finances at risk.”
Have your adult children asked you for access to early inheritance? Have you felt pressured to say yes? If you have been able to help, what legal steps did you put in place to document the deal? Share your experiences in the comments section below.