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Estate planning trap no. 6 – lending money to children

This is the tale of a modestly wealthy father, who made what he thought was a loan to his daughter and son-in-law at about the time that they purchased a home.

Unusually, the arrangement was documented. But it was a DIY job and it was a very strange document that didn’t make a lot of sense.

Money changed hands and the home purchase was completed.

Years later, the daughter and son-in-law separated.  Unable to agree on a financial separation, they ended up in the Family Court. The father intervened in the Court case claiming the repayment of his money under the document created years earlier.

The Court considered the document and could not make any sense out of it and, as a result, found it created no obligation to repay the money.  The father never got his money back and his daughters were not too happy about it.

The simple lesson of the story is: if making loans to children or family members, get the loan drawn up properly by a lawyer.  If done properly, it is far more likely that the agreement will be binding, enforceable and deal adequately with scenarios like divorce and death.

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