Given the significant cost of housing, financial assistance provided by parents for the purpose of assisting their child to purchase a property is becoming increasingly common.
Loans from parents to children are usually unsecured, informal and not in writing, relying on the trust and relationship between the parent and child.
When parties enter a relationship and/or marry, it is rare for them to put thought into how their parents might be protected in relation to repayment of the loan, in the event of the parties separating.
However, in a family law context, there can be severe consequences for you if this well intended financial assistance by your parents is not properly documented and there is no evidence of repayment of the loan.
What happens if you and your partner separate?
Whilst parents are completely upfront with their intention when advancing funds to you and your partner that the loan is to be repaid, disputes often arise in a family law context over the terms of the loan if the relationship between you and your partner ends. Naturally, upon the breakdown of a relationship, you will maintain that the advance provided by your parents is a loan to be repaid from the asset pool whereas your former partner will maintain that the advance was a gift made by the parents and the value of the gift is to form part of the asset pool.
If your former partner is not prepared to accept that the funds advanced were a loan, then your parents can often end up being dragged into your property settlement in the Family Court and may be required to incur significant legal costs to engage their own legal representation to argue that the advance was a loan or to intervene as a party to secure an order for repayment of the loan.
If the Court deems the advance a gift, then the advanced amount forms part of the asset pool to be divided between the parties and the child whose parents advanced the fund may be entitled to an adjustment for that contribution. However, and more importantly, your parents will not be repaid and will lose their money.
Read on to find out how the Family Court determines whether to treat the financial assistance as a gift or a loan.
The Family Court’s Position: Is it a gift or a loan?
When parties apply to the family court for property orders, the Court takes account of the assets, liabilities and superannuation in each party’s name.
Liabilities incurred before or during a relationship are considered to be liabilities of the relationship, regardless of when accrued or whether they are in joint names or only one name.
Where the liabilities of the relationship include an unsecured debt owed to family members, that is not documented, this creates difficulties in a family law context. The Family Court is generally skeptical when a claim of a loan arises from a family member, where there is no solid evidence to support that the loan exists, that it is repayable, and that a call is likely to be made for payment of the loan in the future. In these circumstances, the Court is unlikely to accept the money was a loan and may disregard the debt entirely. The Court may disregard the debt even where it is considered to be legally enforceable if the debt is not in fact enforced or expected to be enforced.
In Biltoft & Biltoft Judge Nygh stated as a matter of principle:
“In taking account of the ‘obligations’ of the parties, I must consider how pressing such an obligation is. It is fairly common in this Court to meet a situation where a parent has made a but which is not in fact enforced and would not really be expected to be enforced. It is no doubt an ‘obligation’ but if the obligation is not likely to have to be met, it should not be taken into account.”to a child which is in all respects legally enforceable,
Case Example: Damiani & Damiani  FamCA 535
- Prior to cohabitation and marriage with the Husband, the Wife and her parents brought a unit;
- The Wife’s parents provided the Wife with the sum of $50,000 to assist her in acquiring her share in the unit;
- A few years thereafter, once cohabitation with the Husband had commenced, the Wife and her parents signed a loan agreement recording the debt owed to her parents of $50,000;
- the loan agreement provided that ‘the borrower shall repay the principal sum to the lender upon written demand’ and there was a provision for the payment of interest;
- The Wife gave evidence that there had been no repayment of the loan to her parents during the relationship or following separation;
- The Wife’s Father said that there was no demand ‘at the moment’ for repayment of the loan on the basis that the Wife had not since separation been in a position to repay it;
- Notably, the Wife had initially forgotten to refer to the debt to her parents of $50,000 as a debt in her financial statement filed with the Court.
- It was suggested by the Husband’s solicitor that given the Wife had failed to refer to the debt to her parents of $50,000 in the financial statement, that the documents evidencing the loan were not documents that she took seriously;
- The Court referred to the case of Biltoft & Biltoft that generally unsecured liabilities would be deducted from the value of assets when ascertaining the value of a property pool, this practice being subject to certain exceptions available in the Judge’s discretion, including whether or not the debt is likely to be enforced;
- The Court held however that while the debt was actionable (i.e. enforceable, by virtue of it being payable on demand and not statute barred) the Wife’s parents were unlikely to call upon the debt any time soon, if at all.
The take home message
When a Court determines whether a sum advanced is a gift or a loan to be included in the pool, the court looks to:
a. Whether the loan is documented;
b. Whether there has been a call for repayment of the loan;
c. Whether there has in fact been some repayment of the loan;
d. Whether there is likely to be a call for repayment of the loan in the future by the person who loaned the money.
If you want to protect your parents and yourself in relation to the treatment of a sum advanced as a loan, we therefore suggest that you have the loan documented in writing including with respect to any terms of interest, to avoid any doubt about the intentions of the parties. Your parents may also wish to have the loan secured by a registered mortgage over your property. Furthermore, we recommend that you make regular and ongoing repayments to your parents of the loan, during the relationship and following separation. Repayment of a loan after property settlement proceedings are commenced may be seen by a Court as a non-genuine attempt to portray that a loan is repayable, when in fact there was never a genuine attempt by your parents to enforce repayment of the loan.
If your parents have lend money to you, we strongly advise you to do the above, so as to better protect you and your parents against the reach of the Family Court.
Are you in a situation where you have separated, your parents have lent you money for the purpose of a property and you are not sure whether it would be treated by a Court as a gift or a loan? Contact us to have a book a reduced rate consultation with our family law expert, Courtney Barton, to have a confidential discussion about your individual circumstances.