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The Dilemma of Loans & Financial Gifts in Family Law
17 March 2015
A dilemma that often arises in family law is whether money paid by a parent to a child (to help with paying the deposit on a home for instance) will be considered a gift or a loan when the child's relationship breaks down and there is a financial dispute.
It is often argued that money received from a parent is a loan and is therefore a debt to be repaid to the parent for the total amount advanced plus interest.
A common mistake made by parents is not to document the loan either in the form of a loan agreement or a mortgage secured over the property.
The Limitation Act 1969 (NSW) provedes that there is a 6 year period from the date money is paid to recover the debt after which the claim is no longer legally enforceable. Time starts to run from the date the money is given to a child and not the date on which repayment of the debt is requested. This is important where a parent may provide a loan at the beginning of the marriage and not ask for repayment whilst the child is happily married. Then the child's marriage breaks down, well after the 6 year period has gone by.
In order to avoid running out of time to enforce the debt, lenders can include in the contract to repay money a term that repayment does not start until a specific period of time has elapsed (Ogilvie and Adams), or a specific event happens.
For instance, the debt will be enforceable if the terms of a loan agreement provide that the loan is payable within 3 months from receiving a demand in writing to repay the loan. The 6 year period will start to run after 3 months and not from the time the money is paid.
If money is given to a child, then the gift will be treated as a financial contribution by the child receiving the gift. However a gift is not treated the same as a loan. In a dispute after relationship breakdown, the party receiving a loan is able to include it as a debt to be repaid in full, or with interest. If it is seen instead as a gift, then the recipient's financial contribution will be taken into account, though not always to as full an extent.
The longer the marriage the less weight will be given to financial gifts received early in the marriage and greater weight will be given to gifts received late in the marriage. This is because over time there is greater intermingling of assets and the value of financial contribution is eroded.
When giving money to a child, you should keep documents such as receipts, bank statements, money transfers etc not only to support the claim of a financial contribution during the marriage but also to assist in calculating the total amount of money that has been paid over time, which in some cases can be significant when compared to the total value of the net asset pool.
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