How are Loans from Parents Perceived in Family Law Matters
Parents increasingly providing significant financial assistance to their adult children – especially to buy homes. For example, in 2024, 25% of first time home buyers received help from parents.
As a result, an increasingly common issue when spouses separate (whether married or in de facto relationships) is how to deal with monies provided by families to the couple during the relationship. Separating spouses, and their families, often have different views as to whether money or other assets were lent or gifted to one or both of them.
A loan needs to be repaid and therefore reduces what is available for division between the separated couple. Gifts remain the property of the parties and are available for division between them. If a gift, one spouse may say it was a gift made just to them and entitles them to a larger share of the overall assets.
What are the legal principles of proving a loan versus a gift?
The starting point is that monies or assets advanced by a parent to a child are presumed to be a gift unless there is clear evidence it was a loan at the time it was advanced. A gift remains a gift. A gift cannot subsequently become a loan because the couple separate. A loan may however be subsequently waived and become a gift.
A loan requires that all parties intend that it will be repaid and that the terms of the loan can be identified, including how it is to be repaid.
The intention and terms of a loan can be shown by evidence of:
- Written loan agreement.
This ideally should be at the time of the loan. In a 2011 case, the husband and his father signed a Deed of Agreement after separation in relation to monies earlier advanced to the husband during the relationship. No repayment had ever been made and none of the terms of the Deed had ever been enforced. The court did not treat it a as loan.
- In the absence of a written loan agreement, a loan agreement can be reflected through an exchange of letters or emails, or be based on a purely verbal discussion provided the terms are clear.
- Repayments are being made in accordance with the agreement. Failure to make repayments in accordance with the original loan terms may indicate the loan has been waived.
Other factors to be considered are:
- How has the loan been represented to third parties.
- Did the lending parents disclose the loan as an asset owing to them when they subsequently applied for social security benefits.
- Did the spouses disclose the loan to a bank when making applications for finance?
- If a loan agreement – written or oral – can be established, have the parties subsequently complied with it?
- Have payments been made? If repayments have not been made a court may find that even if there was originally a loan, it has been waived.
- Have limitation periods passed under the Statute of Limitations?
- In NSW, an action to enforce a loan agreement is 6 years from the default under the terms of the loan.
- Were the monies advanced by the parent personally or instead from a third party entity such as a company or trust?
- Does the loan appear in the financial records of the entity.
- Was the payment made as a distribution of income to the spouse as a beneficiary or shareholder – rather than a loan?
- Is the debt likely to be enforced?
- The Family Court has found in some cases that whilst there was a legally enforceable loan, repayment is not likely to be requested or made. If so, the generosity of the parents in not requiring payment can be treated as a gift or contribution made on behold of one or both parties.
- Whether a gift should be considered a gift to one or both spouse is discussed here.
Sometimes at around the time of separation all or part of an amount previously advanced by parents is repaid to them. The repaying spouse will say it was a repayment of the loan. The other spouse can still argue there was never a loan and the amount that was repaid be treated as an asset of the spouse who paid it back.
Spouses, their families and financial advisers need to carefully consider how to structure financial assistance at the time the assistance was given.
In the event of a separation, they also need to consider how such assistance should be brought into account when calculating a fair financial settlement.
