The treatment of funds transferred by a family member to a loved one: gift or loan? – family and marriage

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Australia: The treatment of funds transferred by a family member to a loved one: gift or loan?

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Family members usually provide financial assistance to their adult children or grandchildren, and they are likely to continue to do so during difficult economic times.

It is not uncommon for a dispute to arise between parties as to whether an advance made by a family member is a gift or a loan. This can have significant ramifications because if the court finds it to be a gift, resources are part of the pool of assets to be shared between the parties and a party’s ability to secure repayment is limited.

The family court examines the evidence on two points:

  • Whether the transaction was a loan (including a loan without formal documentation) or a gift;
  • When the loan agreement is made, no consideration should be given to whether justice and equity dictate it.

The Court may find it appropriate not to take account of any liability that it is “vague or uncertain, unlikely to be enforced or created inappropriately” (In the marriage of: Christopher John Biltoft Cross Appellant / Husband and Valentina Biltoft Appellant / Wife Appeal [1995] FamCA 45; (1995) FLC 92-614 (May 10, 1995))
Indeed the Tribunal asks “Without the breakdown of the marriage, would the loan likely have been drawn and / or enforced, or is it really a gift in disguise?”

Procedure for determining the real estate settlement

  • What is the value of the asset pool?
  • Assess the parties’ contributions
  • If necessary, evaluate adjustment factors
  • Think about whether the outcome is fair and fair

TIPS

  • Make the intention clear. If it is agreed that the debt must be repaid, this must be clearly communicated to the party and their partner / spouse. This should also be done by documenting the layout and keeping a paper trail.
    • The burden of proof rests on the person claiming the existence of the loan, and it is not uncommon for the other party to suddenly develop a “selective memory” for discussion at the time of the advance payment.
    • It is preferable to draw up a formal loan agreement that has clear and precise terms and conditions and is enforceable. The loan agreement should include the date and purpose of the advance, whether interest is due, when the loan is repayable, and whether collateral is provided. It is preferable if the other party (partner / spouse) also signs the agreement or acknowledges its existence.
    • Keep a record of written discussions. If there are oral discussions, make sure that written recordings are sent afterwards to confirm those discussions, e.g. B. Emails. Keep a record of advances actually made and, if interest is charged, a record of fees.
  • Consider taking security, charging interest, and using other protection strategies.
    • The Court is more willing to consider loans on commercial terms where repayment is realistic. Treat loans as you would from a bank, e.g. B. Interest, mortgage or real estate fees, repayments.
  • Be in tune with your intentions.
    • Does a will need to be updated to reflect the existence of the loan and your intention to do so? Do financial records need to be updated? Does the party have to declare the loan in a mortgage application?
  • Don’t wait for a relationship breakdown to take steps to document the loan, obtain collateral, or enforce its terms. The Court will view this with a reasonable amount of skepticism.
  • Note the limitation period. If the debt cannot be legally enforced, it is very unlikely to be part of the asset pool.

We are here to help

Family law matters can be difficult and complex. If you need help with a family law dispute, always reach out to an attorney who can help.

The content of this article is intended to provide general guidance on the subject. A professional should be consulted about your particular circumstances.

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