Housing affordability is a big issue for young Australians. It is natural for parents to want to assist their children. That assistance can extend to financial help, for example when buying a new home. Take care when providing that financial help to protect yourself from the potential pitfalls.
How you document that financial help will make all the difference in whether that money is saved or lost in the event of a divorce, for example;
- Is the money you provide a gift or a loan?
- You may not have thought about it, but it is one or the other.
- If it is a gift, it now belongs to the recipient and is subject to their risks.
- If it is a loan, it is owing back to you.
- Perhaps the most significant consequence is in the case of divorce.
Family law property settlement – the basics
Under the Family Law Act the Court divides all the parties’ assets and liabilities, whether owned jointly or separately to achieve a ‘fair’ result having regard to all the circumstances.
If it was a gift…
If the money was a gift, whether to both your child and their partner, or just to your child, it is available for division by the Court. The money is not protected for your child, or their children, and certainly not for you.
If it was a loan…
If the money was a loan, it is owing back to the lender. It that is you, that means you can claim the money back and it is not part of the pool of assets available to the Court.
If there is a dispute…
You and your child will likely want to argue that the money is a loan and owing back to you, so that it is protected. Your child’s ex-spouse will want to argue that it was a gift and available for them to claim against.
If you are arguing it is a loan, you are going to need some proof.
Documenting the Arrangement
The level of documentation depends upon the importance of the transaction – which really means amount of money involved. For smaller transactions, a simple note may be sufficient. For larger transactions, it is worth documenting properly.
The property documentation means details will not be forgotten and it will more likely hold up in Court. You will incur legal costs in documenting the arrangement, but it is worth it for the protection.
The Terms of the Loan
If the terms of the loan agreement are not appropriate, the loan may be unenforceable.
A loan which is repayable ‘at call’ means repayable whenever the lender asks for the money back. If no repayment date is mentioned, it is presumed to be at call.
An at call loan is unenforceable after 6 years from the date of the advance. This is because the statute of limitations applies and makes the loan unenforceable.
This may seem like a technicality, but it is what your child’s spouse will argue in Court to make the loan unenforceable. If there is no written agreement, this will also be the argument.
This is another reason to ensure the loan is properly documented.
A child’s separation or divorce is one risk. Other risks may be:
- A falling out with your child and they refuse to repay
- Your child becoming bankrupt due to business or other risks.
Proper documentation can protect you from those risks too.
Even if a loan is provable, whether it is repaid may depend upon the assets available and whether you have security.
Security in the form of a mortgage is good protection for a loan, even one between family members.
You should always take legal advice about transactions. Family transactions are no exception and could be seen to place a more important issue at risk – your relationship with your loved ones.
Important transactions should be documented to protect you, but also to protect your children from the potential breakdown of their relationship.
We can advise on these transactions and protecting your position.