It is common for children to receive financial assistance from their parents to buy into the property market, reduce their debt, or afford their children’s school fees. How this financial assistance will be treated is an important consideration in family law matters when a divorce or separation occurs.
When a relationship ends, one of the first steps is to identify the net pool of property/assets that is available to divide. The parties’ equitable and legal interests, such as assets, liabilities, superannuation, and financial resource will be considered in this pool. However, issues may arise as to whether financial assistance from parents should be treated as a loan or a gift, as the treatments will have different ramifications.
Loan or gift?
If the financial assistance was intended to be a loan, the expectation is that it will need to be repaid, which will result in a reduction of the net divisible asset pool. This means the loan will be treated as a liability and will usually be required to be repaid out of the asset pool before distributing total net assets between the parties. If no loan agreement has been made, issues may arise such as when the loan was to be repaid and if interest was required to be paid.
In determining whether it was a loan or a gift the court may consider:
- Whether any written loan agreement exists;
- The terms of the agreement;
- If repayments have been made;
- Evidence of discussions between parties as to the existence and terms of the loan;
- Whether security was provided on the loan and any representations that have been made to other parties such as the bank;
- The timing of the loan (if it was made more than 6 years ago it may not be recoverable under the statute of limitations)
If the financial assistance has not been documented, it will likely be treated as a gift. There will then be no expectation that the money is repaid. Therefore, it can be claimed by the related party as a contribution to the assets of the relationship. The gift will unlikely be attributed to that party in its dollar terms but will be considered as a percentage of overall contributions by that party to the relationship.
Inheritance
The Family Court is required to consider inheritances in proceedings and does not automatically exclude them from the property pool. The court will consider the timing of when the inheritance was received as if it was received at the start or during the relationship it will likely be included in the property pool. However, if it was received later in the relationship or after the separation it may be excluded from the pool.
The recent case of Roverati & Roverati[1] demonstrates the large impact inheritance can have on the percentage of total assets. As a result, the court will also consider other factors such as the history of paid employment and other contributions to the relationship, to help fairly determine the division of assets.
What you can do to protect your financial assistance
There are many ways to help protect your financial assistance received by a parent. It is important to consider making a formal loan agreement to ensure the terms of the loan are specified, documented in writing, and signed by all parties. This will ensure a loan can be identified at the time of separation.
Making a financial agreement with your partner could also be considered. This can be entered into at marriage (prenup), during the relationship, or after separation to isolate the benefit received from the gift or ensure the loan repayments will be binding on a certain party.
Nicola Maltman – Law Clerk – Matthies Lawyers
Should you have any queries in regard to family law matters, please contact Matthies Lawyers for an obligation free consultation or call +61 3 8692 2517 today.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.
[1] Roverati & Roverati [2021] FamCAFC 89.