Loans Or Gifts To Your Children: What Happens When Their Relationship Or Marriage Breaks Down?

Loans Or Gifts To Your Children: What Happens When Their Relationship Or Marriage Breaks Down?

In these challenging economic times, when housing affordability has become out of reach

for an increasing number of young Australians, it is all too common for parents to give them financial help to their adult children.

This is particularly the case as children start thinking about settling down and living the Australian dream of owning their first home.

But what if the dream becomes a nightmare, and your child’s relationship or marriage breaks down, when the issue of the division of your child’s assets and liabilities comes into sharp focus?

What becomes of the financial assistance you made to your child in good times when they suddenly experienced bad times?

Characterising the financial assistance

In determining who gets what after a relationship or marriage breaks down, the Family Courts look at the parties’ assets and liabilities, their financial and non-financial contributions, any adjustments that need to be made for their future needs, and what, after taking all these issues into consideration, is just and fair in all the circumstances.

Financial assistance given by you to your child will be deemed a debt of the relationship, if it is characterised as a loan, or merely a contribution by your child if it is characterised as a gift.

This issue may clearly be important to you and your child particularly depending on the extent and timing of the financial assistance.

What a lawyer would do

Here are the top 8 legal issues we would advise you about on this topic:

  1. It is important that we advise you, and not your child, in the circumstances. The last thing we would want is there to be an accusation of a conflict of interest, which could compromise the advice we would give you and any actions we take on your behalf.
  1. The loan has to be in writing, preferably in the form of an agreement signed by you as the lender and your child as the borrower. We would be careful to ensure that the agreement has all the hallmarks of a loan agreement.
  1. The hallmarks of a loan agreement are: there should be a specific sum specified, the purpose of the loan should be stated in the background to the loan, there should be certain or clear terms of repayment, or at least the agreement should specify that the loan is payable on demand.
  1. Timing in the law is everything. Preferably, the agreement will be executed contemporaneously with the loan advance. The reason for this it is much harder to evidence a loan when the writing is executed years after the payment has been advanced.
  1. Ideally, the agreement should be supported by security. This could be in the form of a caveat or mortgage on your child’s property. Or at the very least the agreement should state that the debtor (your child) accepts and acknowledges that the creditor (you) have an equitable interest in the property which permits the creditor to lodge a caveat or a registered mortgage against the property.
  1. If your child’s partner is to have an interest in the property, for example as a joint tenant of the home, then it would be certainly preferable if your child’s partner is a signatory to the loan agreement such that they are aware of it and bound by it. It would be much harder to prove that an agreement is in fact a loan if your child’s partner is not aware of the existence of the financial assistance.
  1. Better still, in some circumstances, particularly in second or subsequent relationships, it may be prudent for your child to have a Binding Financial Agreement with his or her partner before the relationship or marriage commences, sometimes colloquially known as a “prenuptial agreement”, specifically referring to the loan and the circumstances in which it may be paid (for example, upon the breakdown the relationship).
  1. If some or all of the above characteristics of the loan are evident, then it may be possible for you to intervene in any proceedings against your child and their partner in the Family Courts where the loan is disputed by one or both of them.

What if there is no loan agreement?

We do not live in a perfect world, and clients often come to us when they have not obtained legal advice or addressed the above issues before giving the financial assistance to their child.

There is still hope in these circumstances.

Depending on the time in which the financial assistance was given (again, timing is everything in the law) it may be arguable that the circumstances surrounding the assistance are:

  • indicative of a loan which may be recouped by you as a liability of the relationship or marriage before the net assets are divided between your child and his or her partner;
  • if they are not indicative of a loan, is a gift, then it may at the very least be arguable that the financial assistance should be taken into account as a direct financial contribution by your child through you which would entitle your child to a potentially significant weighting or adjustment in their favour in the overall division of the assets (in other words, they may receive a greater percentage of the assets at the end of the day).

If it is important enough to you, we recommend that you obtain legal advice before you give financial assistance to your child, because if you do not obtain advice and take the necessary action, that loan or that gift which you may have made today may not be able to be recovered or protected tomorrow.

Call us on 8276 7955 or send an enquiry at admin@dirosalawyers.com.au if you are wanting advice or assistance on this or any other family law topic.