Are your parents helping you out by giving you a loan or gift? Here is what family lawyers want you to know…
Are they giving you money as a gift or as a loan, and why does it matter?
This is something you need to decide first (ideally!). If the funds are gifted by your parents, the funds will usually be considered as a contribution made by you to the relationship (Gosper & Gosper [1987] FamCA 43; Kessey & Kessey [1994] FamCA 162). Vice versa, if it is your partner’s parents making the gift, the Court will consider it to be a contribution by your partner to the relationship. Sometimes, the Court will consider the money to be a gift to both of you (and therefore a joint contribution by both of you), but this would require evidence that the parents intended this to be a joint gift (W & W [2000] FamCA 1302).
If it can be established that the funds were loaned, they may be a liability of the relationship, which has the effect of reducing the value of the property pool available for division if you separate.
I want the money to be a loan, what do I do?
The first step is to draft a loan agreement. Ideally, you want this to be drafted by a lawyer to make sure that it is legally sound and binding. It will identify the terms of the loan including the amount advanced, interest to be accrued (if any) and the terms of the repayment.
Can I get a loan agreement and then just not make repayments?
The Court will look to how the loan has been treated such as:
- Have the terms of the loan agreement been honoured;
- What repayments have been made;
- Has security been pursued for the loan; and
- Whether the money has been requested to be repaid by the lender.
Even with a loan agreement, the Court might find that there is no intention for repayment and classify it as a gift (Sulo & Colpetti [2010] FamCA 493).
Further, loans are usually subject to a statutory limitation of 6 years after the date of payment, or 6 years after the lender advanced the money if no timeline for repayment is specified (Ogilvie v Adams [1981] VR 1041). If your loan is statute-barred, this makes it harder to enforce.
If the Court finds that my loan is legitimate, and not a cloaked gift, does that mean it will be deemed a liability on the balance sheet?
Not necessarily. A Court can disregard a loan, even if it is found that it is legitimate. This may occur if the Court finds the loan to be vague, uncertain, unlikely to be enforced by the lender or unreasonably incurred.
(Af Petersens & Af Petersens (1981) FLC 91-095; Biltoft & Biltoft (1995) FLC 92-614)
What do I do if I’m unsure?
Dealing with parental loans and gifts is something that we commonly deal with at Ali Family Lawyers. We can consider the specific circumstances of your matter and advise you on your prospects. We also regularly represent parents who have lent their children money and wish to intervene in the proceedings to recover their loan.