In today’s financial market, it is not uncommon for parents to financially assist their children with the purchase of real property or contributions to their business. What happens in the unfortunate event that the couple that receive assistance from one or both parents separate? Was it a gift or was it a loan?
Gift
A gift is characterised as the voluntary transfer of property or funds with no expectation of repayment to one or both parties to the relationship.
Gifts made by parents to their child/children are considered to be made to benefit their child/children and/or grandchildren, even though the gift is received by both parties. This gift is then characterised as a contribution by the party with the generous parents.
In circumstances where a party is arguing the gift was made to both parties, the burden of proving the gift was made to both parties lies with the party asserting the gift was made to them both. The threshold to refute this presumption is high. If it is accepted that the gift was made to both parties, the gift is not characterized as a contribution by either party.
Loan
A loan is a transfer of funds with the expectation that those funds will be repaid, often with interest.
Characteristics of a Loan
Ordinarily loans are documented by way of a loan agreement. The loan document needs to clearly identify the borrower, loan amount, interest, repayments and security given for the loan amount in the event of a default. In most circumstances where a parent is lending money to their child/children, loan agreements are not entered into but are discussed and agreed verbally.
Is it a loan?
When determining whether advanced monies by a parent are a loan, the Court takes into consideration the following:
1. Is there a loan document or a verbal agreement?
2. Are there actual recorded repayments being made? Where the repayments regular? When did the repayments start and was there any interest charged and paid.
3. Did the parents seek security or register a security for the sum advanced?
4. What were the parents actual intentions at the time the money or property was advanced?
5. Was there any representations made to other agencies with respect to the loan (such as a bank or other financial lender)?
The Court can disregard loans in certain circumstances. Some of the circumstances are:
A. If a loan document exists, unless there is evidence the parent expected the money to be paid back and had taken steps to pursue the child/children for the sum loaned. Did the parent and child/children have the intention to create a legal relationship?
B. A parent who advanced funds but did not have the intention to create a legal relation in any technical sense. Meaning, a parent does not seek repayment of loan until the parties separate.
C. When a parent and child/children enter into loan documents following the party’s separation.
D. If the loan is vague, uncertain, unlikely to be enforced and unreasonably incurred.
If you and/or your partner will be receiving financial assistance from a family member during your relationship, you may want to consider speaking to our Family Law Team to obtain preliminary advice as to the implications in the event of separation and also speak to our Commercial Team to assist with the preparation and execution of the appropriate loan document.