My parents offered me financial assistance – how can I protect them in my property settlement?
As the cost of living in Australia skyrockets, it is increasingly common for parents to lend a helping hand to their children. It might be in the form of a house deposit, cash to venture into the stock market or funds to jump at a business opportunity.
Whatever the case may be, disputes in property settlement often arise over money advanced by parents during a marriage or de facto relationship.
Upon separation, all too often one party will seek for that money to be repaid to the parents from the asset pool and one will seek for that money to remain in the asset pool for division.
The categorisation of money advanced by parents during a marriage or relationship – as a gift or as a loan – affects its treatment during family law proceedings.
As in layman’s terms, a gift does not need to be paid back and a loan does need to be paid back. It follows therefore, that the categorisation of such financial assistance is pivotal to whether it can be protected in a property settlement.
How does the Family Court treat gifts?
The second step of the Four Step Process requires the Family Court to consider various contributions made by the parties to the property pool.
Unless otherwise stated, a gift is considered to be for the benefit of the party whose parents gave that gift. This means that when assessing each party’s contributions, the gift is treated as an indirect financial contribution of the party who received the gift.
A number of factors will determine whether this indirect financial contribution alone will give rise to an adjustment on property settlement: the size of the gift relative to the overall property pool, the length of the parties’ relationship, how long ago the gift was received and how the gift was utilised.
For example, one party’s parents may gift them the funds to purchase an unencumbered property at the beginning of the relationship. If the equity in the unencumbered property were used as security to make further acquisition of property possible, advancing the overall wealth of the joint asset pool, this gift is a form of a financial assistance that would be considered to be a significant contribution of that party.
That being said, all steps of the Four Step Process and unique circumstances of any given case must be taken into account before an accurate property settlement adjustment can be determined.
How does the Family Court treat loans?
Generally speaking, financial assistance via a loan incurred during a marriage or relationship is considered to be a joint liability of the parties. A joint liability should be repaid from the asset pool, reducing the funds that are available for division between the parties.
Taking advantage of this principle has become common practice for parties in a property dispute, seeing parties redefine what was once universally understood to be a “gift” as a convenient “loan”.
A loan agreement might be drawn up to protect the parents’ financial assistance that was intended for both parties’ shared benefit while they were together, but not to be distributed for the ex-spouse’s benefit after separation.
Behind closed doors, loan agreements of this nature are rarely intended to be enforced by the parents if their child defaults on repayment.
Case law has established that some loans may be disregarded where there is vague evidence as to its legitimate existence and vague evidence of its intentions to be repaid.
In the decision of Af Petersens & Af Petersens (1981) FLC 91-095, Justice Nygh stated:
“It is fairly common in this court to meet a situation where a parent has made a loan to a child which is in all respects legally enforceable, but which is not in fact enforced and would not be really be expected to be enforced. It is no doubt an “obligation” but if the obligation is not likely to have to be met, it should not be taken into account.”
Essentially, the Family Court will look at surrounding evidence when determining the treatment of a loan and whether it should be taken into account.
How do I protect any future loan from my parents?
It is important to be able to provide clear documentation that evidences the existence of a loan. The Family Court is more likely to recognise parents’ financial assistance as a loan where the following criteria are met:
- The loan is recorded in a written agreement;
- The written agreement specifies important terms, such as the duration of the loan and structure of repayments;
- There have been repayments in accordance with the terms of the agreement (and evidence to prove this is so);
- There is a registered mortgage or charge against a property as security for the loan.
While a verbal agreement with no past repayments can still constitute a valid loan, it is far more difficult to prove its existence to the Family Court. It will be more likely to be categorised as a gift and treated as an indirect financial contribution of the party who received the gift.