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Gifts versus loans in divorce

Gifts versus loans in divorce

It is actually quite common for young couples getting married or living in a de facto relationship to receive financial assistance from their parents; either money or transfer of property or both.

This is becoming particularly prevalent given increasing property prices where young couples are simply unable to enter the property market without their parents assisting them.

If the relationship breaks down and the couple separate, this can be a significant issue of contention as there are differing views as to what should happen with the money or property that was provided by either one or both sets of parents.

A very important issue is whether the money provided by the parents is a gift or a loan. What we commonly see is that what was initially a gift can quickly become a loan and vice versa.

If the money is a gift then it is not repayable by the parties when they separate; or at all in fact.

The next question then is whether the gift was intended to be for the benefit of the spouse whose parents gave the money or whether it was to be the parties’ jointly. 

How does the court treat gifts in Family Law?

Generally a court treats the gift as being for the benefit of the spouse whose parents gave the gift unless it is in recognition of some service made by the parties jointly to the parents; for example if both parties had worked in a family business without pay.

When assessing entitlements, a spouse’s parent’s gifts are treated as contributions on that spouse’s side of the ledger when weighing up their entitlement. This means that it is treated as an extra contribution that spouse made and would increase their property settlement entitlements should the relationship break down.

What if the money provided is a loan?

If the money is a loan, the next question is whether the loan is legally repayable and if so whether it is likely to be repaid.

The Family Court has jurisdiction to deal with loans between separated couples and third parties (such as their parents).  How the loan is treated depends on the evidence that is provided about the loan.

Where the loan is unsecured, the court can choose to deal with the pool of assets by either deducting the loan from the pool of assets or not.  A court is less likely to deduct the loan if it is vague or uncertain and if it is unlikely to be enforced.

To examine this question we look at whether there is any oral or written evidence regarding the loan, such as an informal or formal loan agreement or a mortgage and also whether the parties have complied with the terms of the loan such as if repayments have been made.

What this means is that if money is provided by parents to a couple and there is no written evidence to support that it was a loan and no repayments were ever made, it will be very difficult to satisfy the court that it is in fact a loan and that it should be repaid from the parties’ property.

It is likely to be treated as a gift on behalf of the party whose parents advanced the money.

Where there is formal loan documentation, a court is much more likely to deduct the loan from the total pool of assets, particularly where the terms of the loan have been complied with by all parties.

Parents, are you considering loaning money to your child who is married or in a de facto relationship?

It is extremely important that, if parents are considering lending money or property to a child who is either married or part in a de facto relationship (or even before any relationship) that there be clear documentation to show that it is a loan which will include:

  1. a loan agreement setting out the terms of the loan which is signed by all parties involved; and/or
  2. a mortgage over the property securing the loan.

After this documentation has been entered into, it is also important that the parties comply with the terms of the loan. This means that if the loan provides for repayments to be made, that they are actually made and if the loan is to be repaid upon the happening of a certain event or after a certain period of time that they do so or enter into a new loan agreement.

The different treatment of money advanced by parents as either a gift or a loan can significantly affect the outcome of a property settlement.  Parents can also end up losing their money to their child’s former spouse if it is not secured property and this can impede both their retirement plans and standard of living.

It is important to seek specialist legal advice from a lawyer experienced in Family Law about these issues prior to giving any money to a child who is getting married or entering a de facto relationship.

Today’s article is written by Partner in Family Law, Ryan Thomas.

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Ryan Thomas

Partner in Family Law

Please note, this Blog is posted in Adelaide, South Australia by Andersons Solicitors. It relates to Australian Federal legislation. Andersons Solicitors is a medium sized law firm servicing metropolitan Adelaide and regional South Australia across all areas of law for individuals and businesses.

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