How Are Loans Made by Parents to Children Treated When They Divorce?

How Are Loans Made by Parents to Children Treated When They Divorce?

How are loans treated when you divorce

Many parents wish to help their adult children financially throughout their lifetime, for example by advancing money to fund a deposit to buy their first home. These advances are rarely documented.  But what happens to that money if the adult child subsequently separates or divorces? 

There are two ways the Family Law courts can treat a payment made by a parent to a child in a property settlement:

  1. The court may accept the payment is a loan that ought to be repaid in full to the parent. The loan will then be included as a debt repayable to the parent in the property pool.
  2. Alternatively, the court may determine the payment was a gift to the child, with the parent having no expectation of repayment. This would generally be a contribution on behalf of the spouse that received the payment from their parent. Such a contribution (in the absence of other evidence) will increase the percentage weighting given to the child’s contributions.

The difference is that if a loan is established it is repaid to the parents’ dollar for dollar like any commercial loan whereas if the advance of funds is treated as a gift it is not.

If the money is advanced as a gift at the time, you cannot change your mind and say it was a loan if your child’s relationship deteriorates in years to come.  Because of the nature of the relationship between parent and child, there is a legal presumption, called a presumption of advancement, that any advance is a gift unless it can be proved that that the money was advanced by the parent to the adult child on the express condition that it should be repaid.

If you are gifting money to children and expect to be repaid, it is imperative to ensure the loan is properly documented and certain steps, in case you find yourself in the unenviable position of being caught in the middle of a matrimonial dispute between your child and their estranged partner. There are a number of ways to protect a loan advance made by parents and you should consider all of the following:

  • Enter into a properly drafted Loan Agreement with your adult child and their partner. This Loan Agreement should set out in detail the terms of the loan, interest payable, and due dates for instalment payments.  The loan should not specify that it is repayable upon demand as this will trigger the operation of the Limitation Act 1969 and the legal right to demand payment will be extinguished if a demand for payment has not been made within six years. Also, keep a record of being repaid in accordance with the loan agreement.
  • Secure the Loan with a Mortgage over property. The mortgage documentation should be executed by the borrowers and they should be required to obtain legal advice in relation to their obligations in relation to the loan and the mortgage.
  • The adult child should consider entering into a Financial Agreement pursuant to the Family Law Act with their partner. The Financial Agreement will set out how assets are to be divided in the event of a separation and the terms should include reference to repayment of the loan from parents.

If all of the above steps are taken, then it is as much protection as you can get should your adult child separate in the future.

Should you wish to discuss this with one of our experienced Family Law team please contact Solari and Stock on 8525 2700 or click here to request an appointment.

Article written by NIkita Ward

Photo by Redd on Unsplash

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