As the cost of living increases and it becomes harder for young people to get a foot into the property market, it is becoming quite common for parents to provide funds to their adult children to either assist them with purchasing property, or for various other expenses ranging from medical expenses, weddings or even holidays. So is it a loan or a gift?

Unfortunately with the increase in this type of practice, there is an increased likelihood that these types of transactions will at some stage come under the scrutiny of the Family Court if the parties separate, and may be taken into account when the Court is considering the division of assets between them.

Why does it matter?

Whether funds advanced are determined to be a loan or a gift is important in the event of separation because when coming before the Court for a property division, gifts and loans are treated differently and can significantly affect the final outcomes in a property settlement, and ultimately, the ability for parents to get their money back.

It could also be the difference between having parents dragged through a costly Court process with their children in the event that a dispute arises in respect of monies lent to the parties during the relationship.

If the funds are determined to be a loan, then it would likely be included in the parties’ asset pool as a liability and will be viewed as a debt when calculating the total asset pool of the parties, thus reducing the amount available for distribution between the parties and allowing the parents to be repaid.

Alternatively, if it is deemed that the funds were in fact a gift, the parents will not be repaid and the amount advanced can be included as an asset when calculating the asset pool, and becomes available for distribution between the parties.

Although it is likely presumed to be a contribution made to the relationship by the party whose parents advanced the funds, (which can result in that party being entitled to a larger share of the property pool), the amount of the gift can be diluted by numerous factors, including the amount of time that has passed since the gift was given and the length of the relationship.

Of course there are various other factors which can affect the final property division between the parties, but it is prudent to be aware of this common issue if you are contemplating lending money to your adult children who are in relationships.

There is a general presumption at law, absent any evidence to the contrary (such as a loan agreement, mortgage etc), that money provided from a parent to a child will be considered a gift. Therefore, parents who have provided money to a child on the assumption that the money would be paid back often face great difficulty in proving that to be the case if they failed to get any formal documentation drawn up to reflect the agreement between the parties.

The takeaway

If you are contemplating lending money to your children and their partners, it is imperative that you obtain independent legal advice from one of our commercial lawyers, and ensuring that the loan is properly documented in a well-drafted loan agreement that sets out all of the terms and conditions of the loan.

This way, in the event of a dispute arising, there is a clear evidentiary record of the agreement between the parties, including the initial loan amount and any payments that have been made.

While Affinity Lawyers understands that these types of conversations may be uncomfortable to have, they are important in protecting your interests in the future should your child and their spouse separate and your child’s spouse attempts to dispute the existence of a debt owed to you.

Affinity Lawyers are able to provide you with legal advice tailored to your specific circumstances, so please do not hesitate to contact our office on (07) 5563 8970 to discuss your matter.