It is common for parents to continue to support their children financially, even when they become adults with partners and children of their own. Parents may help their children by providing money to assist with the purchase of a house, payment of a loan or for many other reasons. This money may sometimes be a gift, and in other cases it may be a loan which is expected to be repaid.
The question of whether money contributed by a parent was a loan or a gift plays a particularly important role in family law proceedings. If the adult child is going through a relationship separation, they or their parents may wish to argue that the money was a loan which will need to be repaid while the former spouse may wish to say it was a gift. If the money is a gift rather than a loan, it may be included in the assets available for division and the spouse may be able to claim some entitlement to that money.
The following questions can provide some guidance as to whether a parent’s contribution would be viewed as a gift or a loan:
1. Is the agreement in writing?
If there is no written agreement it is less likely that the contribution would be considered a loan.
2. Are there any repayment terms (i.e. set amounts to be repaid within certain timeframes)?
If there are no repayment terms, the arrangement is unlikely to be considered a loan.
3. Are the repayment arrangements similar to those of a traditional loan?
If they are, this would indicate that the contribution was a loan.
4. Have the repayments been made?
If so, this would indicate a loan arrangement.
5. Has there been any demand for repayments?
Requests for repayments would suggest the money was loaned and there was an expectation that it be repaid. The timing of the requests is important. If made during the relationship, this would indicate the money was a loan, however if demands were only made leading up to separation this is not conclusive, as there could be other motives behind such requests.
6. Capacity to repay?
Without real prospects of repayment it is harder to argue the contribution was a loan. An ordinary lender would consider the person’s ability to repay before loaning any monies.
7. Do the facts and evidence provided suggest there was an intention to create legal relations?
This can be determined on a case-by-case basis. Where parents and children want to ensure that money loaned gets repaid in the event of the adult child’s relationship breakdown, they may take a number of steps prior to separation including:
1. Ensure the loan is documented in writing and there are provisions such as, repayment on sale of the property, or other repayment terms.
2. Take partial ownership of the property or asset in question.
3. The child and their partner enter into a binding financial agreement that upon separation any monies loaned would be repaid to the parents.
If you require assistance with the division of your property post-separation you can contact our family law team on 07 4092 3555.
Loan or Gift? Parental Contributions and Property Division
