If your relationship ends, what happens to the financial support from your parents? Does it form part of the property pool?
It is increasingly common for parents to provide adult children with significant financial support to help them with buying their first home. In the event of a breakdown of the adult child’s marriage or relationship, disputes can arise about whether this financial support was a gift or a loan. In many circumstances parents often rely on the trust and relationship between the parent and child, creating agreements that may be vague, uncertain and unsecured.
The way this financial support is characterised in family law proceedings will determine whether a parent can recover the funds. This often has a significant impact on the division of the property of the adult child’s relationship. For example, if a lump sum payment from a parent to their adult child is characterised as a loan, it will likely be argued that it should be repaid from the assets of the relationship. On the other hand, if the payment is taken to be a gift, it may lead to a larger share of the property being paid to the adult child who received the gift – but perhaps not reflecting the payment dollar for dollar.
The presumption of advancement and financial support from parents
An important consideration is whether the Court will apply a legal presumption known as the presumption of advancement. This presumption means that in certain circumstances. the court will take payments from parents to children to be a gift. The presumption can be contradicted if a party can show evidence that there was a different intention for the money before the payment was made. For example, a written loan agreement may rebut the presumption of advancement.
Is the financial support a loan of a gift?
When determining whether the financial support is a gift or a loan, the Court will consider:
- Whether the loan is in writing
- Whether there has been a call for repayment of the loan
- Whether there has been some repayment of the loan
- Whether there is likely to be a call for repayment of the loan in the future
Is the loan vague or uncertain?
If the Court considers the financial support from a parent to be a loan, the Court may still find that the loan should not be considered if it is vague or uncertain. For example, a person claims there is a loan. But in previous communications with a bank, they said the money was a gift.
This scenario was discussed in a Full Family Court case in 2018. The Court had to consider two signed documents which were inconsistent:
- The first document was a letter to the mortgage broker acting for the adult child confirming that the money was a gift
- The second document was a loan agreement providing for the adult child to repay the money
The Court found that the money was a gift, not a loan, because:
“… there was no evidence to suggest that the son was likely to offer any repayment in the foreseeable future, nor that he would have the capacity to do so …”
Is the loan legally repayable and if so, is it likely to be repaid?
The next question is whether the loan is legally repayable and if so whether it is likely to be repaid. In a 1995 case, the Full Family Court said:
“It is fairly common in this Court to meet a situation where a parent has made a loan to a child which is in all respects legally enforceable, 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.”
The Full Court decided that the husband’s loan from his father was a gift and therefore would not reduce the property pool.
The Family Court may choose to disregard a debt if a parent has failed to enforce it and there is no certainty that it will be enforced in the future. It means that if a loan is to be included in the property pool of the relationship, it must be likely that there will be a future requirement for its repayment.
Loans that are repayable on demand
When you are drafting a loan agreement with your adult children, it’s crucial to exercise caution. If difficulties arise, the wording of the agreement could determine how these funds are treated by a court. For example, a 1981 Supreme Court case establishes the principle that if an alleged loan is repayable on demand, then the obligation to make payment arises as soon as the loan is made. This is important because Victorian law may prevent recovery of a secured loan after six years, and an unsecured loan after 15 years.
How can we help?
If your relationship has broken down after receiving financial support from your parents, you will need legal advice as soon as possible. Also, if you are a parent considering financial support to your children, we can advise you about the appropriate way to structure and document financial support arrangements within families. Contact us for more information about financial support and family law issues.
This article was written by Lawyer, Joanna Taylor
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can receive from marshalls+dent+wilmoth and other relevant experts.