Things to consider when making loans, gifts and advances to children

Apr 24, 2018
loans gifts and advances to children

By: Sandra Tabori, Lawyer, M. Fisc., Wealth Planning Group

Sometimes parents make loans, gifts and advances to their adult children during their lifetime for various purposes including, to help them purchase a home, start a business or fund their education. They do this without fully considering the potential implications, such as the risk of claims by creditors or by the child’s spouse on marriage breakdown, as well as possible conflicts among the children on the settlement of the parent’s estate.

As a parent, you should ensure that you clearly document any gifts, loans or advances you make to your children to avoid uncertainty and possible conflict.

  • For gifts, there should be clear documentation of your intention to make the gift, which should also comply with any applicable formalities in your province.
     
  • Loan documentation should clearly identify the borrower(s) and set out the repayment terms, including whether interest is payable on the loan. Loan repayments made by the child should also be regularly recorded.
     
  • Advances made to a child during your lifetime that are intended to be counted against a child’s future inheritance should be clearly documented and accounted for in your will.

Importance of documentation

Documenting loans or gifts to a child also serves to establish the timing of the loans or gifts, which can be an important consideration on the division of property in the event of a breakdown of your child’s marriage or common-law relationship. This may also help protect property gifted to the child from a claim by clearly establishing the source of the property and its exclusion from marital property where applicable.

If your intention is to help a child purchase a home, you should consult with your legal advisor about how you can protect the home and/or your contribution to its purchase in the event of a future breakdown of the child’s marriage or relationship, such as whether you should make a loan to your child, rather than a gift, and whether the loan should be secured by a mortgage.

If you have made loans or gifts to some but not all of your children, or if you gave or loaned different amounts to each child, you may want to provide for adjustments to be made on death to ensure that all your children benefit equally. If so, you must ensure that this is properly provided for in your will. For example, you should decide whether a loan to a child is to be repaid on your death or if the loan is to be forgiven, with a corresponding adjustment to that child’s inheritance. You may also wish to consider whether to provide for additional gifts in your will to your other child or children to compensate for gifts made to their sibling(s) during your lifetime or loans that are forgiven.

Keep in mind you should also consult with your tax advisors about possible tax implications to you and/or your child.

Conclusion

When making a loan, gift or advance to a child during your lifetime, consult with your legal advisor to ensure that it is properly documented and accounted for in your will to ensure that your intentions and arrangements are clearly reflected and there are no unintended consequences.

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