Parents Who Make Loans To Children Must Insist On Getting Signed Documents
Your adult child tells you she is having money problems and she asks to borrow money. Being a loving parent, you give her a check. Was this a gift or a loan? Are you expecting to be repaid in the future when your child's financial situation improves?
Let's assume it's a large amount of money, and you've been reading about the importance of having signed documents for family loans. So you mention to your child that it's time to sign something, and to your utter surprise, your child says it was a gift.
After agonizing about it, you decide to hire a lawyer and file a lawsuit to recover this money. In most lawsuits, a person who lends money to another person must prove it was a loan. The proof you have to submit in order to win must make the judge or the jury believe it's more likely that not that this was a loan rather than a gift. This means you must tip the scales ever so slightly in your favor, for example, 51% to 49%.
But if the person you loaned the money to is your child, the burden of proof is much higher. You now have to provide "clear and convincing evidence" that it was a loan. Why? Because the Court will presume that the transfer of money from a parent to a child is a gift.
Therefore, be sure to protect yourself and your spouse by having your child sign what's known as a demand note.