The bank of mum and dad - gift or loan?
Despite the recent drop in interest rates, high property prices around the country mean the trend of receiving monies from the “Bank of Mum and Dad” so that their children can become first homeowners is only likely to increase. When that child and their partner separate – the question is then how those monies are considered in a property settlement.
It is commonplace in Family Law property settlements to see arguments about large cash advances made by parents to one spouse or a couple. Commonly, the spouse of the ‘lenders’ (in this case the parents) will assert that the money loaned and must be paid back and therefore a liability to be taken into account in the property settlement. The other spouse (the now removed in law) often argues that the monies were gifted and therefore should not be included in the property settlement as a liability but should instead be treated as a contribution. Treating the money as a gift or a loan can have a significant impact on the final settlement reached and the amount of money available for distribution.
Put simply, if it is a loan it will have to be paid back or the liability for it assumed by one of the parties so decreasing the property pool. On the other hand, if the monies are treated as a gift then the property pool will not decrease by the loan amount and there will be more money to be divided between the parties.
So how does the Court determine if the money was a loan or a gift in Family Law proceedings?
There are several factors that the Court looks at to determine if money was loaned or gifted. These factors are not exhaustive, and the Court will look at the circumstances overall to determine the appropriate way to treat the money.
The four factors a Court will usually consider are:
1. Limitation Period
2. Terms of any written Loan Agreement
3. Indicia of a Loan
4. Should the loan be enforced?
Lets look at each of these factors one by one:
1. Limitation period
In each state and territory there is legislation that provides a strict time period or “limitation period” setting an expiration date for when someone can bring proceedings to enforce a loan. In every state and territory in Australia the limitation period for a loan is six (6) years from the date the cause of action arose, except for in the Northern Territory where the period is three (3) years. If you try to bring a claim outside this time you may find it difficult or impossible to do so.
There is case that provides that to avoid any issues with the limitation period of a loan, you should have a written agreement which states that the loan is repayable on a certain date or upon a certain event such as three months from demand for payment to avoid the constraints of a limitation period.
2. Terms of any written Loan agreement
Though a loan agreement may be oral, failing to document an agreement can cause significant issues when attempting to discern the intentions of the parties at the time the money was provided. It also makes it more difficult to determine the terms of the loan. Oral or ‘Gentlemen’s Agreements’ are fraught with difficulty and can create a ‘he said she said’ situation. Lawyers like to talk about evidence and the best evidence to establish intention is a written loan agreement.
3. Indicia of a Loan
For the Court to be satisfied that money was intended to be a loan there is certain indicia or distinguishing marks that the Court looks for. As the old saying goes – ‘If it looks like a duck, swims like a duck, and quacks like a duck, then it is a duck.’
The distinguishing marks of a loan which the Court looks at are:
a. Amount provided;
b. How was the money advanced;
c. Where were the funds sourced and who was the lender;
d. Is interest payable;
e. Terms of repayment; and
f. Any subsequent variation to the terms of the loan.
4. Should the loan be enforced by the Court?
Even if a Court is satisfied that the money given was intended to be a loan and not a gift, a Court does not have to enforce a loan if it is determined that the loan was:
a. Vague or uncertain;
b. Unlikely to be enforced; or
c. Unreasonably incurred.
How can you ensure funds you have loaned or to be loaned are protected in a Family Law settlement?
If the money is given on the basis that it is to be repaid, then you should seek legal advice before the funds are transferred and have a loan agreement drawn that states the intention of each of the parties to the transaction.
If you need advice on loan agreement and Family Law then get in contact with us at KLP Family Law. Getting the right advice now can save you, your children or parents thousands of dollars in the future.
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