Family law and the difference between loans and gifts from parents to children
If you are a parent thinking of providing financial support to your child, whether to assist them in purchasing a property, or just to tide them through tougher times, you need to consider the following first.
Do you intend to provide a gift, or is it a loan? Why is it important to distinguish between the two?
Many parents think there is no need to formalise matters when it comes to their own children since it is within the family. However, there is a common scenario we have encountered during our practice that may make you think twice.
When a marriage or de-facto relationship breaks down and become subject to family law property settlements
In family law property settlements, the starting point is to determine the couple’s asset pool, made up of their assets and debts. The final sum of the asset pool is the amount available to be distributed between the parties, subject to the Court’s ruling.
There is a legal presumption that money advanced by parents to a child is a gift, with no need to be repaid, unless the presumption can be rebutted. If the presumption cannot be rebutted, i.e. it cannot be proved that the money was meant to be a loan, it will be seen as forming part of the couple’s asset pool and subject to the distribution determined by the Court.
In other words, that money could be distributed to the child’s spouse as part of the property settlement.
We will look at some real life case examples to further illustrate.
- In Pelly & Nolan  FMCA 530, a father loaned his son $250,000.00 to buy a property. After that property was sold, the father loaned a further $70,000.00 to the son for the purchase of another property. A loan agreement was prepared by the father specifying repayment dates and interest rates. The son made some repayments towards the loan. The court found on the balance of probabilities that it was likely the son would have repaid the loan. Consequently, the sum of $320,000.00 was classified as a debt to the father and paid out of the matrimonial asset pool to him, prior to distribution of the remaining pool between the parties.
The Court also found, however, that there was no intention for the interest component of the loan to be repaid and excluded this amount in quantifying the debt to the father.
Further, there were additional sums of money, approximately $175,000.00, advanced by the father to the son over the years which were not formally recorded and the court found there was no intention for those sums to be repaid. They were classified as gifts and not deducted from the asset pool for distribution between the parties.
- In Maddock & Anor (No 2)  FMCAfam 1340, a father advanced $240,000.00 to a couple to assist them in buying and building a house. There was no loan agreement or specified terms of repayment. In fact the father had not sought any repayments and no repayments were made, until separation and family law settlement. The Court looked at the intention of the parties and determined that had the parties not separated, the father would never have demanded repayment of the money. Hence the money was deemed to be a gift and formed part of the matrimonial pool for distribution.
- In Bauer v Bauer  FCCA 1125, the husband’s parents advanced significant amounts of money to the husband. Although the wife did not dispute that the majority of those advancements were loans, she did dispute a particular sum of $110,000.00, contending that it was a gift and not a loan. Although the husband had not made repayments toward the $110,000.00, there was a loan agreement in place. The court also took into account evidence that he had made repayments for some of the other sums advanced and on the balance of probabilities, determined that there was intention to repay the $110,000.00 and hence it was a loan and not a gift.
Every case is unique and the court looks at many different factors, such as the intention of the parties, evidence of formal documentation and repayments.
The common factor is that there are serious financial consequences.
If you intend for money advanced to your child to be repaid and you wish to protect that money and avoid potential disputes in future, you cannot leave it to chance.
Some of our recommendations include:
- entering into a formal loan agreement that clearly sets out the repayment term and conditions, interest rates, security required and background and intention of the parties to the loan;
- taking security for the loan, such as registering a mortgage or caveat against the borrower’s property; and
- ensuring that the borrower makes regular repayments and that the repayments are properly recorded.
This is not an easy area of the law and advancing money to your child could have more implications than you think.
It is highly recommended that you speak to your lawyer before proceeding, to avoid costly problems in future.