Helping kids financially can backfire without legal safeguards

Wanting to help your kids get ahead financially is a common goal for parents – but it’s one many undertake too casually, according to a legal expert who’s seen what happens when things go awry.

“Please make sure you document it,” wealth and succession lawyer Andrew Clements told Nadine Higgins on The Prosperity Project podcast.

What starts with generosity and good intentions can otherwise become a legal and emotional minefield.

“Tragically, a number of lawsuits have developed where parents haven’t done that and… it’s resulted in family meltdowns,” Clements says.

He’s also blunt about one way you should avoid helping your children.

“We say to clients, we’ve got one rule: don’t give a guarantee.”

Clements says he’s pleased the method is no longer common, as he’s seen the damage when things go wrong.

“A mum guaranteed her son, who was a builder. The builder’s development went under, he went broke, and the bank came in, sold all the assets - and then sold mum’s retirement home out from underneath her”.

He also strongly advises parents to document their assistance as a loan, not a gift, even if the bank isn’t keen on seeing other debts.

“Often banks go, well, we’ve got a problem if mum and dad are lending money… and many advisers are having mum and dad sign a gift statement at that point - don’t sign one of those.” He urges.

He says if you can satisfy the bank you’re not charging interest, or taking security over the property, then “the bank’s fine with there being a loan document in place... we have that every week and never have a problem”

Clements says documenting your financial help as a loan can also help protect those funds in the event of a relationship breakdown.

That doesn’t mean having to enforce those agreements when things go wrong is easy.

“It’s a very awful process to go through ... there’s only really been one occasion where I couldn’t [resolve it] and one parent wanted to sue one of their children”.

He also urges parents to be deliberate about not just how they help, but when.

“You’ve got to make sure they are [ready] – not everyone is.” Clements says.

But Clements’ biggest piece of advice isn’t legal, or financial.

“If you don’t have a values conversation with your kids, you’re going to have grief.”

Watch or listen to the full episode of The Prosperity Project for more.

The Prosperity Project is hosted by Nadine Higgins, an experienced broadcaster and financial adviser.

Follow the show at iHeartRadio, Apple Podcasts, Spotify or wherever you get your podcasts. New episodes are released every Monday.