Gift vs Loans in Divorce

With sky high property prices and tightening lending criteria there has been a huge increase of the ‘bank of mum and dad’. In fact, according to the financial comparison website, Mozo, the ‘Bank of Mum and Dad’ is now the fifth largest lender on mortgages in Australia.

If you are the person giving a significant gift or loan to your adult child, the possibility of their marriage or de facto relationship ending and their ex-partner claiming the money can be a legitimate concern.

An important detail, is whether the money you provide is a gift or a loan. Secondly, whether the money was intended to be the benefit of just your adult child or also their partner.

Related Article: Property Settlement and Divorce: Key Facts You Need To Know

Gifts and Loans in Family Law

A gift received by a party to the marriage or de facto relationship will most likely be counted as a financial contribution they made to the relationship; if the gift was received prior to the start of the relationship, it will be categorised as an initial contribution.

Hence, In a property settlement assessing entitlements, a gift is treated as contributions on that spouse’s side of the ledger when weighing up their entitlements.

However, if the gift was seen to be gifted and intended for both parties in the relationship jointly the courts may view the gift as an equal contribution and it will be divided accordingly.

Loans are treated differently in property settlements from outright assets. How the loan is treated will depend on the evidence that is provided about the loan.

If the arrangements of the loan can be accepted as a loan the money that is repayable to the parents (lenders) is deducted from the pool of assets which would be divisible between the separating parties. Parents in this case or are the creditor in the same way as a bank and are entitled to have their loan repaid before any of the net assets are divided between the separating parties.

Note, the courts need to be satisfied that a loan actually exists otherwise the money is likely to be regarded as a gift.

To prove a loan there needs to be clear documentation, which will include a loan agreement setting out the terms of the loan which is signed by all parties involved and/or a mortgage over the property securing the loan. On top of this there needs to be evidence that the agreements of the loan have/are being fulfilled, for example, with repayments over a certain period.

If you are considering gifting or loaning your child who is getting married or in a de facto relationship, it is important to seek legal advice from a lawyer experienced in Family Law.

Note: This is general information advice only and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters, please contact us on 03 9620 0088 or email info@resolveconflict.com.au