Parents are becoming increasingly reluctant to provide financial support to their adult children or provide them with monetary gifts because there are concerned that it could be swallowed up in a divorce. So, if you are an anxious parent keen to make sure family wealth intended for your adult children won’t fall into the hands of their ex-spouse, read on to find out what you can do.
A common way to approach the issue of giving a gift of money could be to suggest that the payment was a loan instead. Although, to be clear, these efforts are not always successful. Even if the payment was a genuine loan, the court can often view them as being “soft loans” that will not need to be repaid, regardless of the stated intentions of the parent and their children. The commonly used phrase, “in advance of inheritance” is something the court hears a lot. The consequence of this is that even though money is, theoretically, owing, it can be disregarded by the court and the payment is still considered to be an asset.
What effective way is there to pay money to my adult child without exposing it to the risk of a claim during a divorce?
If you have gifted your adult child a significant sum of money to help them get on the housing ladder, as discussed above, there is a danger that it will be absorbed into the matrimonial asset pot and the equity in the property could end up being shared with the spouse they are divorcing.
This situation has led to a notable rise in the number of parents insisting their child enter into a pre-nuptial agreement. This is to ensure that the gift given only goes to their child and is not shared between their spouse if they divorce. For further information on pre-nuptial agreements, read our guide.
Are there any other legal avenues that can protect the bank of mum and dad?
If the couple are purchasing a property with the money, then you could always place a legal charge (further details below) over it that would protect your investment and bolster the argument that the funds should be returned to the giver.
There is always the option of drawing up a Declaration of Trust naming the parents or gift givers in their favour. This would also provide a strong argument for the money to be returned. Care should be taken when drafting a Declaration of Trust, however, as those naming only the couple without reference to the provider of the funds will offer very little protection, and will be subject to the wide discretion of the court.
If there is no formal document detailing the financial help and repayment terms, it can make it harder for the money to be returned to the givers in the event of a subsequent divorce. This is because it could be argued that it was either a soft loan or an outright gift.
What is a legal charge over a property?
One of the best ways to protect the money you are lending to your adult children is to make a formal loan and secure it by registering a charge against the property. However, if there is a mortgage, the lender must consent to this. If the property is sold in the future, the loan could be paid back.
Could I jointly purchase the property with my adult child?
You could always jointly purchase a property with your child and take out a joint mortgage, although this would make you jointly and severally liable for repayment of the loan. This option will need careful consideration and specialist advice should be taken before buying.
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