Loans to Adult Children - A Risky enterprise

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Parents, quite understandably, want to encourage and reserve their offspring. Sometimes that involves financial aid being provided to adult children in the form of a loan. Unfortunately, many arrangements like this are poorly documented, and may cause great anguish later on, particularly if one of those adult children becomes sick, dies unexpectedly, is adjudged bankrupt, or is affected by a connection breakdown. For example:

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- If your adult child becomes sick, and can no longer work, he or she may be unable to repay the loan.

- The child's insolvency or bankruptcy may forestall the loan being recovered.

- Upon a person's death, their executor must be satisfied that all claimed debts are legitimate. Although an executor's rejection of your claim could be challenged, the legal costs to bring such a challenge may make it uneconomic.

- Where your adult child is in a relationship, an foremost observation is either the loan is to your child only, or to the couple. In the latter case, what happens if the merge detach - who repays the loan?

Following separation, the branch of asset and debts is often contentious, and one party may dispute an alleged liability to the other's parents. In some cases it may be needful for parents to come to be a party to court proceedings between the separating couple, to ensure they get paid out of the couple's assets.

Before development a loan to an adult child, you should at least regain a document, signed by the child (and, if appropriate, his or her partner or spouse) acknowledging the debt, and also the terms of the loan, such as when the loan is to be repaid. Definite points to note:

- If there is no express provision for repayment, your loan might end up being regarded as a "gift."

- If the reimbursement terms require the borrower to pay interest or fees, you may need to comply with consumer prestige legislation.

- Where your child has real estate or other property, think obtaining the right to regain the debt by way of a mortgage or charge over that property, if this facility is available in your jurisdiction. This way, when the loan has been advanced, you may be able to lodge a mortgage or caveat against the land title, or register your security interest in relation to other property. reimbursement of your loan should then take priority over unsecured creditors if your child has financial difficulties. However, the procedures required, and the effectiveness of a mortgage or caveat in protecting your interests, will depend on the law of the state where the transaction takes place or where the parties reside.

- Your ability to recover a loan debt that has fallen due may be affected by a statutory time limitation - ie, if you don't act to recover the debt soon after its due date, you may be prevented from recovering the debt later on.

- If you die, is the loan to be repaid from your child's heritage under your Will, or, alternatively, would you want the debt to be cancelled? This may require your Will to be changed. Also, if the loan is "on demand", your executor may examine immediate repayment, possibly forcing your child to sell asset or regain a more costly loan elsewhere. It helps to contribute for these matters when the loan is first arranged.

Unless the loan is very small, a lawyer should be engaged to draft an acceptable deed or agreement, to ensure that all needful disclosures are made to the recipients of the loan, and to register any relevant security interests.

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