In a rising property market, parents are increasingly helping fund their child’s deposit for their first home. Many families also continue to wholly or partially fund their adult children’s lives indefinitely; buying them successive houses, businesses or cars, paying out their debts or otherwise rescuing them from financial scrapes.
Such generosity is rarely documented.
Parents may expect repayment but understandably trust their child will pay them back when they are financially able to do so.
Alternatively, money may have been advanced to an adult child without (many?!) strings attached during that child’s marriage or relationship, but that relationship begins to fail and parents want to act protectively.
What happens in those circumstances if the adult child separates from their spouse before they have repaid their parents, assuming it was ever intended that they would?
There are two ways The Federal Circuit and Family Court can treat a payment made by a parent to their child in a property settlement:
- The court may accept the payment is a loan that ought to be repaid in full to the parent. The loan will be included in the property pool.
- 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.
‘Bank of mum and dad’ should act like any other bank when advancing money to their children. This is because The Federal Circuit and Family Court are reluctant to accept that a child has a loan owing to their parents unless there is clear evidence of their parents’ expectation of repayment. This requires, for example:
- A written loan agreement was entered at the time the money was advanced, or at least during the relationship. It is not so compelling to produce a loan agreement that has been entered into after separation. An informally written ‘IOU’ that has not been properly drafted by a lawyer, may also not suffice.
- The loan agreement was at arm’s length terms, including for instance, a commercial interest rate, repayment schedule and clauses to call for repayment.
- Security was taken for the loan, such as a second registered mortgage encumbering the child’s house.
- A record was kept of the loan being repaid in accordance with the loan agreement.
After separation, it is common for the other spouse to argue that money advanced by their ex-partner’s parents was a gift not a loan, despite any unwritten understanding that existed during the relationship.
If you are gifting money to children and expect to be repaid, it is imperative to ensure the loan is properly documented and security taken, in case you find yourself in the unenviable position of being caught in the middle of a matrimonial dispute.