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Loans to Family members - other potential problemsProblems are most likely to arise if Peter should separate from his spouse or if he died before the parents. Although we do not like saying it, Lucinda could make life very difficult for the parents. This would be especially so if she formed a new relationship and remained on the land and the parents had to take steps to get her ejected.Likewise Peter could default on his obligations. Roughly ½ of all relationships end in separation and if the parents were not being repaid, it may cause financial hardship for them. The parents will need to keep good records on repayment to make sure that there is not a dispute between the parents and Peter / Lucinda or with the other children about the amount outstanding. This is a very real possibility if the loan is not totally repaid at the time of death. The proposal includes a payment of a 'one off payment representing adjustment for CPI appreciation during the term of the loan' in lieu of interest. Although it should not be subject to taxation, the parents should seek specific advice about this. The buildings will need to be covered by insurance during construction and after completion. It is important that all members of the family know the details of the transaction as this should alleviate suspicion and possible disputes after the parents' deaths. What is the current value of the land - has it depreciated since it was bought and if the parents had to enforce the loan could the parents recover the loan in full? Is the loan sufficient to complete the construction? The parents should feel comfortable and not pressured to make the loan. Although this is a family transaction and Peter and his spouse are fortunate to have the parental assistance, as the future is so very uncertain, the parents should try to work like a bank. In other words seek the best protection for themselves. Ultimately the decision on protection is a matter for the parents. The parents, no matter how loving, need to look at the matter pessimistically. So long as the loan repayment and Peter's and Lucinda's relationship are going well, there should not be a problem with whichever method the parents employ. The method will, however, become important when things do not go according to plan. There is much scope for this. As the loan is between family members it is obviously important formalities are kept to a minimum, but our recommendation in this instance would be repayment of the existing loan and the parents hold the only mortgage over the land. |
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