The question often arises when a marriage or a defacto relationship breaks down as to whether monies advanced to one of the parties, usually by a parent or parents, is a loan or a gift. The difference can be important in dividing up the assets and liabilities of the parties.
Ideally a loan, by say, a parent or parents of one of the parties should be fully and properly documented. For example, Susan needs $50,000 to enable she and her partner, Joe, to buy a house. They have borrowed as much as they can from the bank, but they are $50,000 short to purchase their dream home. Susan approaches her Mum and Dad who are able to loan her the $50,000. How should this be done, to protect Susan, and her parents, in the event that her and Joe’s relationship breaks down?
Well, the easiest way is for Susan’s Mum and Dad to write out an old fashioned cheque (note: the banks will soon stop doing cheques), payable to Susan, who puts it in her bank and draws the money out again to complete the purchase of the house. There is a legal presumption that says that money paid by parents to a child is called “Advancement”, or a gift, not to be repaid to the parents. While, under the Family Law Act, that $50,000 would be considered a gift to Susan by her parents, it would be “taken into account” in a property settlement between she and Joe, as a contribution from her side of the family. However, such a gift would become less important as time went by so that, after 10 or 15 years, it would be of little benefit to Susan in a property settlement for Joe. If Mum and Dad’s cheque was payable to Susan with Joe, or if it were electronically transferred to their joint bank account, it would still be treated as a financial contribution by Susan.
If Susan’s Mum and Dad intended that the $50,000 in our example was actually a loan to Susan, they should have properly documented it. This is done by a legally enforceable Loan Agreement, drawn up by Mum and Dad’s solicitor. The Agreement would be between Mum, Dad and Susan, with or without Joe’s involvement, although he certainly should be made aware of it, in writing for example, by an email or a text message.
The Loan Agreement should set out what the loan was for (in this case, to help Susan and Joe buy the house), the arrangements for regular repayments, or that the loan be repaid on demand. Any repayments of the loan should be properly recorded by Mum and Dad. The Agreement should state whether or not the loan was with interest and, if so, the interest rate and repayment arrangements. It is also a good idea for Mum and Dad to have their solicitor prepare a mortgage document, which they and Susan sign, and send a copy to the mortgagee bank.
Even if the loan is properly documented, it may still be held by a Court to be a gift. A 1961 case which, despite its age, is still good law, the Judge said:
“In taking into account the ‘obligations’ of the parties I must consider how pressing such an obligation is. 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 aspects legally enforceable (i.e., a properly drafted, signed and witnessed Loan Agreement) 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 be met, it should not be taken into account.”
An Agreement can also be entered into after the parties of a relationship have separated. In our example, Mum and Dad may agree to make all or part of the regular bank mortgage repayments for Susan and Joe, if they, or one of them, could not or would not continue the repayments after they separated. But again, this should be properly documented.
It should also be noted that, if a Loan Agreement says that the loan is to be repaid “upon demand” and no repayments are made for 6 years from the date of the Loan Agreement then, in our example, Susan would have a defence under the Victorian Limitations of Actions Act 1958 and may not have to repay the loan to her parents. In that situation, the Court in a Family Law case between Susan and Joe would treat the loan, not as a repayable loan, but as a “contribution” to the family assets by Susan.
As you can see, this is a difficult area of the Law. It is highly recommended that you consult your Family Lawyer before making a loan or a gift to a family member where there is the possibility that the member’s relationship with their partner may break down in the future and the nature of the loan or gift may be called into question.