Risks of Giving Money to Your Child

Parents often want to help their children buy their first house.  Often they give their child a large amount of money towards the purchase.   The child then makes the regular monthly mortgage payments.

The problem is that if the child divorces, half the money you gave your child then goes to their ex-spouse.  This is not the parent’s usual intention.

The only way to avoid this problem is to transfer money to your child as a loan instead of a gift.  The terms and conditions of the loan will have to be in writing and signed by your child and their spouse.   The document should include the amount of the loan, the purpose of the loan, the interest rate if any, and the fact that the loan is due on demand, or on the event of your child’s separation from their spouse.

Separating spouses often claim that the money given to them by their parents was a loan, but without any supporting documents, it is almost impossible to prove.  Taking a few minutes to document the loan will save a lot of future grief.

You can forgive the loan to your child in your will, or at any other time you wish.

Keep in mind that some banks will require you to sign a document called a gift letter saying that the money your gave your child was a gift.  Experienced counsel will know to look for that gift letter.  A judge will then have to decide on the conflicting evidence whether or not the money was a loan or a gift.

David R. Barth

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s