One of the most important decisions families face is whether to structure financial help as a gift or a loan. This choice has profound implications for everyone involved, and it's not always straightforward.

When a gift makes sense:

You're in a strong financial position and don't need the money returned. Gifting can be simpler from an administrative perspective, as there are no ongoing repayments or interest calculations to manage. It's also psychologically cleaner: your child doesn't carry debt, and you don't need to think about whether they're keeping up with repayments.

You want to provide inheritance advancement whilst you're alive to see your children benefit. Many parents prefer this approach, reasoning that they'd rather help their kids when they actually need it rather than leaving everything until after death.

You want simplicity and finality. Once money is gifted, the transaction is complete. There's no ongoing financial relationship to manage, no potential for awkward conversations about missed repayments, and no need for formal agreements.

When a loan makes better sense:

You need to protect your own financial security. If there's any chance you'll need this money back, whether for your own retirement, unexpected medical costs, or other purposes, a loan structure is essential.

You want to treat multiple children fairly. If you have other children who haven't yet needed help, a loan ensures you're not advantaging one child over others. The loan can be accounted for in your estate planning, or other children can receive equivalent loans when they need help.

You need to protect the money from your child's relationship property. As we discussed with Sarah's situation, loans offer substantially more protection than gifts during relationship breakdowns.

You want to maintain access to government support later. A properly documented loan won't be considered "deprivation of assets" by Work and Income, whereas a large gift may affect your eligibility for residential care subsidies.

You're helping with a business venture or other non-property purpose. When money is being used for purposes other than a house deposit, a loan structure often makes more sense as it maintains clearer boundaries and expectations.

The hybrid approach: loans with forgiveness provisions

Some families choose a middle path, structuring the arrangement as a formal loan but including provisions to forgive some or all of the debt under certain conditions. For example:

• A loan that's forgiven by 20% each year, becoming fully forgiven after five years if certain conditions are met (such as the relationship remaining intact, or the borrower maintaining regular contact with the lenders).

• A loan that converts to a gift upon the death of the lenders, ensuring the money doesn't need to come from the estate but maintaining loan status whilst the parents are alive.

• A loan with flexible repayment terms that can be adjusted based on the borrower's circumstances, but maintains the legal status of debt throughout.

This approach provides some advantages of both gifts and loans, though it does require more sophisticated documentation to ensure all parties understand the terms and conditions.

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