The importance of documenting gifts and loans to family members

Parents frequently provide their children with financial assistance to purchase a home or an investment property.

Financial assistance provided by a parent to a child will be considered a loan or a gift for family law purposes.

If financial assistance is provided to a child who is in or enters into a relationship and that child subsequently separates from his or her spouse, the nature and treatment of the financial assistance often becomes a point of contention for the purposes of a property settlement.

It is therefore important to properly document such financial assistance to ensure the parents’ intention in providing financial assistance is given effect.  

Gifts

Gifts received from parents before or during a relationship are considered indirect financial contributions for family law purposes and will form part of the asset pool for distribution.

If parents wish to provide a gift to their child, it is prudent for a gift to be documented to ensure the gift can easily be attributed as a contribution by the parents’ child in the event of family law proceedings.

Although a gift will be considered a contribution on the part of the spouse on whose behalf it was made, the weight the Family Court may give to the gift in considering a property settlement is influenced by a number of factors and it is unlikely that the child on whose behalf the gift is made will receive a dollar for dollar adjustment to the value of the gift.  

Indirect contributions made early in a relationship are given less weight and said to “erode during the course of the marriage”, as opposed to indirect contributions made late in a relationship which can sometimes be “quarantined” and protected from Family Court proceedings.

Loans

Alternatively, parents may provide financial assistance to their children by way of a loan. Liabilities incurred during or prior to a relationship will be considered a liability of the relationship and will minimise the asset pool available for distribution in the event of separation.

It is important to ensure that a loan by parents to their child (or a couple jointly) is appropriately documented so that it will be considered a liability for family law purposes. There have been instances where the Family Court has determined that a loan made by parents is partially or fully excluded as a debt from the asset pool because it could not really be expected that the repayment of the loan would be enforced.

Factors that the Family Court will consider in determining whether a loan is a true liability of the relationship include:

• Whether the loan is documented and provides for repayment within a period of time.
  

• Whether the loan has previously been treated as an obligation to be fulfilled.
  

• Whether the loan is secured by way of mortgage or charge.
  

• The likelihood that the debt will be enforced, including whether there is any conduct by the parties to the contrary.

For more information contact:

Lisa Hunt
Principal
Harwood Andrews
T: 03 5226 8584
E: lhunt@harwoodandrews.com.au