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Home | Blog | Financier Parents: Loans in Family Law may be the riskiest of them all

The average Sydney-sider has long been forced to deal with the pressures of rising house prices and incomes that are struggling to keep up. Newlyweds are expected to perform the improbable (at times impossible) and use all their might to stretch their budgets far enough so that they too could achieve the Australian suburban dream that their parents have so elegantly fulfilled. However, soon enough the number crunching bank officer reveals a harsh reality, indisputably and in black and white – purchasing a home just isn’t an option without the financial support of their parents.

Parents, overwhelmed with a desire to help, are all too eager to loan or often gift the lovebirds a sum of money to be applied towards the purchase of their first home. How could a parent resist? This is their opportunity to ensure that their child is ‘set up’ for a fairer future and an easier life.

But years later and often out of the blue, the ground shaking reality of divorce and pending property settlements present a unforeseen consequences. Having once been a non-issue, the loan or gift suddenly becomes a significant contention.

Is it a loan or was it a gift? Will the parents ever see the money again?

A series of cases in the Family Law Courts have highlighted the implications of such advances and the prospects, if any, of recovery. This is a complicated area, and there is no clear legislative guidance.

Why does it matter whether the money was a gift or a loan?

If it is ultimately determined that the money advanced was a gift by the parent to their child, it will be treated as a contribution by the partner whose parent advanced the money. This means that the money will form part of the matrimonial pool of assets that will be divided between the husband and wife. The significance or weight given to that contribution will depend on many factors, including the length of the relationship.

How can you tell if the money was a gift?

The primary characteristic is that there is no expectation that the money be repaid. For example, in the case of Sulo & Colpetti [2010] FamCA 493 (18 June 2010) the father gave to his married adult son two advances of $150,000 in the form of purported loans without interest and “repayable on demand”. The money was used by the husband and wife to purchase properties as joint tenants. The husband then received a further $230,000.00 from his father by way of an unsecured loan, used to discharge a mortgage. A loan document was drawn up by solicitors and signed by the husband and his father. The judge determined that although the advances were superficially set up as loans, “there is no evidence that the husband’s father intended to actively pursue a claim against the husband for the monies“. As a result, the Court did not characterise the transaction as a loan.

What are the characteristics of a loan?

There are a number of characteristics that, if present, indicate that the money advanced was a loan. Firstly, a loan transaction occurs at ‘arm’s length’. There needs to be agreement, either orally or in writing as to the terms of the loan and any formal loan agreement should include as a minimum the term of the loan, the interest payable and the minimum repayments.

For example, in Maddock & Maddock & Anor (No.2) [2011] the father gave his son and daughter in law $240,000.00 towards buying a house. There were no terms of repayment, no formality in the agreement, the parties had no capacity to pay and most importantly there was no demand of repayment until the family law proceedings started. The Court concluded that if the parties had not separated the father would never have requested that the funds be repaid. As a result of the lack of any expectation that the money be repaid, the advance was considered a gift.

Presumption of Advancement and the Limitation Period

There are two more hurdles that make it harder for loans to be established. Firstly, where money is advanced by a parent to their child, at law it is presumed to be advanced as a gift unless there is sufficient evidence for the basis of an inference to the contrary.

Secondly, a loan is essentially a contract. As such, parties to a contract have a period of 6 years to enforce the contract from the date of any breach. An example of a breach would be the failure to make a repayment as per the terms of the loan. Once the 6 years has expired, the innocent party is statute barred from enforcing the loan. The enforceability of the purported loan has been a crucial factor in Family Law cases in which the characterisation of the moneys advanced has been in dispute (see Vadisanis & Vadisanis and Anor [2014] FamCAFC 97 (12 June 2014).

Conclusion

Any parent considering giving their children a financial head start should seek independent legal advice before advancing any money. The advice you are given can impact upon whether that money is ultimately repayable.

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