It is becoming increasingly common that couples receive financial assistance from their parents. This can be through the transfer of property, the giving of money or both. Although helpful for major financial decisions such as the purchase of property, this assistance can cause issues if the couple separates as there can be a dispute as to whether the money provided should be considered a gift or a loan.
In a property settlement, the Federal Circuit and Family Law Court (“Family Court”) can treat payments made by a parent to their child in two ways:
- The Family Court may find that the payment was a gift to the child which is not expected to be repaid.
- The Family Court may find that the payment is a loan from the parents that is to be repayable in full.
How does the Family Court treat gifts?
In general, the Family Court treats gifts from a parent as being for the benefit of their child alone. Because of this, when assessing entitlements, the court will apply such gifts towards that spouse’s side of the ledger when determining their entitlement. As a result, the spouse may receive an additional contribution reflecting the impact of the gift on the relationship.
However, if the intention was that the gift was to be provided to both parties to the relationship then it would be open for a spouse to contend that the gift is to be taken as an equal contribution of both parties.
How does the Family Court treat loans?
If the money is determined to be a loan from the parents, the court must then determine whether the loan is legally repayable and in doing so, they must consider whether the loan is likely to be repaid in the foreseeable future.
If the loan is unsecured, the court has discretion to either deduct the loan from the pool of assets or not. If the terms of the loan are vague or uncertain, the court is less likely to enforce the loan. Evidence about the loan determines how the loan is treated. If there is any oral or written evidence of the loan, and the parties have complied with the terms of the loan through actions such as making repayments, the court may be likely to uphold the existence of a loan. However, if there is little or no evidence that supports the claim that it was a loan, and there have been no repayments made, the court would be less likely to uphold the existence of the loan.
Considerations for parents when lending money to their children
If you are considering lending money to your child who is married or in a de facto relationship, it is important that there is documentation that adequately establishes that the money provided is to be treated as a loan.
The documentation can include:
- A loan agreement being a formal document that records the terms and conditions of the loan, including repayment obligations, interest rates (if any), and rights of the parties, and is signed by all parties involved.
- A mortgage over the property that secures the loan
Further to the documentation, it is important that the parties to the loan comply with its terms and obtain any appropriate legal advice. Repayments must be made if necessary, and if the payment of the loan is reliant on an event or time period which has passed, a new loan agreement should be entered into.
Contact Us
If you have separated from your partner and your parents have lent you money and you are not sure whether it will be treated as a gift or a loan in court or if you need advice in relation to lending money to your child who is in a relationship, please contact Etheringtons Family Lawyers in North Sydney on 9963 9800 or message us here.