By Nicholas Kyriakoudes and Jasmine Cario
Is it a loan or a gift?
In equity there is a presumption (called the presumption of advancement) that when money is advanced from a parent to a child (or between a husband to his wife), the advancement is a gift and not a loan. The presumption applies where there is a lack of evidence which would indicate the funds were a loan.
To eliminate this presumption, and to ensure you can recover funds from your child, an agreement should be documented before any funds are advanced to your child. The preferred method of documentation of a loan is by way of a Deed of Loan which gives you a longer period of time to recover the debt after a breach (currently twelve (12) years) compared to a Loan Agreement (which currently gives you six (6) years from the date of the breach to take action). Hansons Lawyers are able to assist you with the preparation of your agreement by way of Deed of Loan and advise you on the relevant limitation periods you must be aware of.
Loans are funds which are provided to a party, generally to be used for a certain purpose, and repayable during set period of time. Loans from parents to children can be used to benefit children such as to help start a business or buy a home.
The terms of the loan should be carefully considered and we strongly recommend you engage a Solicitor to prepare the Deed of Loan to ensure its validity.
Gifts are provided by parents to children with no obligation of repayment. When a gift is made, the person receiving the gift becomes the full legal owner of the subject of the gift and does not need to make repayment. For a gift to be made, the following needs to occur:
- There must be an intention by the donor to make a gift.
- There must be acceptance of the gift by the person receiving the gift.
- There must be delivery of the gift.
The significance of the loan/gift distinction
For family law, succession, and asset protection purposes, identifying whether the giving of money from parent to child is a loan or a gift is important. Evidencing whether funds are a gift or a loan is especially important in circumstances where there is a breakdown of a relationship and a party is engaged in family law proceedings, when a party dies or if a party becomes bankrupt.
Family Law matters to consider
When a relationship breakdown occurs and a family law property settlement is commenced, all assets owned by each party to the relationship and all liabilities owed by each party to the relationship are considered. A net property pool is then established and divided – e.g. one party may receive 40% of the net property pool and the other party may be awarded 60% of the net property pool – depending on the circumstances.
In Family Court proceedings the court can only make property orders in relation to property which is actually owned by the parties to the proceedings, see https://hansonslawyers.com.au/property-settlement-division/.
Where a parent gifts funds to their child, those funds are considered an asset of the child and the Court may order all or part of those funds to be repaid to the child’s former spouse (your child’s ex-partner) in the course of the property division between them.
If the funds were given to a child by way of loan and subject to the terms of that Deed of Loan and any limitation period, the funds are considered a liability in the family law property proceedings and is repayable to the parents in full.
Estate matters to consider
If funds are provided to a child by way of loan and the parent dies, then the balance of the loan outstanding at the time of the parent’s death is repayable by the child to the parent’s estate. The parent may wish to forgive the loan upon their death and if so, this should be carefully documented in your Will.
If funds are provided to a child by way of loan and the child dies, the child’s estate will be liable to repay the funds to the parent in full.
If funds given by a parent to a child are a gift and the child dies, then these funds will not be recoverable by the parent and will form part of the child’s estate and distributed pursuant to the terms of their Will. Please note, Wills can be challenged after a person dies by eligible persons as defined under Section 57 of the Succession Act 2006 (NSW) (see https://hansonslawyers.com.au/contested-will/).
If a child is declared bankrupt, a parent can seek to have the debt repaid with other creditors. However, if a gift is made and a child becomes bankrupt, the parents cannot recover any amount because there is no obligation for repayment.
Just because a loan agreement is signed, this does not guarantee that funds advanced by a parent to their child is a loan. This is because a loan must be legitimate in the circumstances.
If a loan by a parent to a child is not a legitimate loan, then legally the advancement of the funds to the child may be deemed a gift. This can lead to the implications discussed above.
A court will consider the circumstances of a loan to determine whether the loan is true and genuine. In assessing the circumstances of the loan, the court may look at the following factors:
- Whether there is a contract for loan or written documentation.
- What the terms of the loan are – including the duration of the loan, rate of interest, and repayment dates.
- Whether the deal is commercially viable. The court will consider whether interest rates charged are comparable to the rates charged for home loans or personal loans by institutions.
- Whether security was taken for the loan such as a mortgage.
The importance of drafting and documenting loans
Given the implications that occur when a parent gives money to their child, either as a gift or a loan, it is important that parents are well advised of these consequences when they are preparing to provide financial support to their children. Properly drafted and documented Deeds of Loan are critical in proving genuine loans. If you would like to discuss a parent to child loan, please contact our firm to arrange an appointment.
If you would like advice or to draft a loan agreement please contact our office on 42 222 666 or at firstname.lastname@example.org