As noted in our first newsletter under our new brand relaunch of Rockwell Bates (previously R.B Flinders) our Rockwellians were reading an interesting article in the Financial Standard; “Bank of Mum and Dad forking out serious dosh”.
The article discussed the trend in parents advancing monies to their adult children to provide financial assistance. Although it looked at such advancements from the standpoint of a financial advisor, it got me thinking about its treatment in a family law context.
The current property market, has made it difficult for young Australian families to attain the Australian Dream and own their own homes due to the significant increase in house prices.
In my experience as a family lawyer it is common in family law property proceedings, for a parent advancing monies to their adult children (and/or their partner) by way of financial assistance to help them “get ahead” in life in purchasing either their first home or investment property, or assisting in renovations or providing assistance to the mortgage or living expenses, if they are going through financial hardship.
However, what occurs when the adult child separates from his or her partner?
Characterisation of the monies advanced
One of the many contentious issues that often arises is the characterisation of the monies advanced by a parent and/or family member to an adult child of a relationship. Usually the question is; was the money advanced by the parent and/or family member a gift or a loan?
The treatment of the monies given will most likely have a significant impact on the property pool available for division and the outcome of the property settlement.
To understand the impact we need to understand how loans and gifts are treated by the Courts in Family Law.
Debts that have been incurred before and during the relationship are included in the property pool available for division as a liability of the relationship regardless of whether they are in the joint or sole names of the parties.
Debts incurred after separation is usually more of a grey area but they can be included in the property pool so long as the party who incurred the debt can prove that it was incurred for the joint benefit of the parties. If not, it may be considered a personal liability and not a debt of the relationship and therefore, not be included in the property pool available for division.
The effect of including of a debt will reduce the overall value of the property pool. Any property settlement also need to take into account the repayment of the outstanding debt.
Monies advanced by way of a gift is considered a contribution made on behalf of the party whose parent and/or family member provided the financial assistance.
The effect of the contribution may require an adjustment be made in their favour which may result in them obtaining a greater entitlement in their property settlement. However, this is dependent on various factors such as when the monies advanced was gifted and the length of the relationship.
Is it a loan?
Parties seeking that the monies advanced by a relative or friend be characterised as a loan is often met with scepticism by the Courts, especially in circumstances where there are no loan agreement or any formal documents in support of their assertion.
It can also be particularly contentious because even if a party has evidence, such as a loan agreement as it does not automatically mean that a Court would treat it as a loan.
In case law surrounding this issue, the Courts have noted the following in deciding whether the monies advanced was not a loan (this is not an exhaustive list):
- If the loan is vague or uncertain;
- The loan is unlikely to be enforced;
- The loan was unreasonably incurred;
- If there is no evidence that the parent and/or family member intends to actively pursue the repayment of the loan;
- The loan was statute barred;
- The party did not treat the obligation to repay the loan as an immediate pressing need;
- There is no record of any payment of, or demand for, interest on the loan;
- There is no evidence of any repayments of the loan being made.
To ensure that there is a greater chance that a Court would consider monies advanced as a loan the following factors are relevant:
- There is a written loan agreement setting out the terms of the loan such as, terms of the repayments, interest to be accrued, timeframe of loan to be repaid;
- The terms of the loan agreement is clear;
- There is evidence that the intention of the parent and/or family member to actively pursue the repayment of the loan.
- The loan is secured either by way of a registered mortgage;
- There is evidence of regular repayments of the loan.
The moral of this story is to ensure that the intention of monies advanced by a relative is clear and documented from the outset so that parties do not have to expend further legal costs in arguing this issue.
If you have any questions about the legal consequences arising out of monies that have been advanced to you by a relative (or indeed have paid the monies yourself), you can contact our office and speak with one of our experienced family law lawyers.