Loan or a gift? What to consider when giving money to family members

Family harmony can take a hit from disputes around money. Photo / 123RF

Whether it be help with tuition, a car or a first home, it’s not uncommon for parents to provide their adult children with financial help in difficult times.

But are both parties clear about whether there is an expectation the money will be paid back?

A recent Disputes Tribunal ruling resulted in a Kiwi father losing in his bid to be repaid $5000, which he claimed was a loan to his daughter.

Tom Hartmann, personal finance lead at the Retirement Commission and Sorted, said it was extremely important to avoid ambiguity around what is a loan or a gift.

“Family harmony can definitely take a hit from disputes [around money].

“Most money struggles or arguments … are usually not about money. It’s just because money is a very tangible thing … it’s quite evident in our choices with it that it becomes the focus of the dispute. But it’s typically not about money itself.”

Hartmann said surprises can often cause disputes when money is involved.

“The antidote to that is really clear communication about the gift, if it’s a gift, or a loan. If it’s a loan, obviously it needs to be fully documented.”

He said families can do a loan agreement, even for smaller sums of money. If the money is a gift, a gifting letter should be considered.

“To put it in writing is a very helpful thing ... to really give clarity if conflicts arise later down the road.

“Without that clear communication, people can be taken by surprise as to what the other half was thinking and of course the relationship can change.

“It does seem like estrangement these days between the generations can occur and is seen as a solution sometimes. The finances of it can unravel quickly without documentation.”

Hartmann said the matter of gifting or loaning money to children can also create the issue of fairness.

“It’s important that, for example, if there are siblings, that things feel fair,” he said.

Whether it’s a small sum of money or a larger amount, Hartmann said people must first consider their own financial position before giving to others.

“Retirement security has to be prioritised,” he said.

“People need to have the view towards their own retirement before transferring wealth early.”

Last year the Herald reported on a Kiwibank-commissioned survey that revealed one in three first-home buyers had received financial help from the “bank of Mum and Dad”.

But Joanna Pidgeon, director of law firm Pidgeon Judd, warned parents gifting money for a first home to consider a relationship breakdown between a child and their spouse.

“[Parents] probably don’t want the spouse to get half of that kind of prepaid inheritance as a windfall on the ending of a relationship,” Pidgeon said.

“So there might need to be a relationship property agreement recording that a gift essentially remains the property of the child if the relationship ends.”

Cameron Smith is an Auckland-based business reporter. He joined the Herald in 2015 and has covered business and sports. He reports on topics such as retail, small business, the workplace and macroeconomics.