Loans from Parents and Third Parties in Property Settlements

"If I receive a loan from a family member or friend during my marriage does it have to be repaid after separation and who has to pay it? What if I thought it was a gift?”

Property disputes involving a spouse’s parents as a “third party” are becoming increasingly common in family law matters. The Family Law Act gives the court extensive powers to make orders that can alter the rights, property interests and liabilities of third parties.

It’s quite common for a parent to give or loan money to their adult child during a marriage to help with various expenses or buy the family home. Unfortunately when the marriage ends, the loan (or gift) may become an issue between the parties when it comes time to divide the assets.

Whether the Court considers the money to be a loan will depend on:-

  1. Whether there is any documentary evidence that is was a loan (eg; loan agreements, emails etc);
  2. Who the money came from. There is a general presumption at law that money from a parent to a child will be considered a gift, unless there is documentary evidence to the contrary); and
  3. The terms of repayment and when the money was initially loaned (as the statute of limitations to enforce a loan repayable “on demand” generally expires 6 years after the money was advanced to the borrower).

If you are considering loaning any money to your children, you should seek legal advice and ensure it is documented properly, otherwise, you may not be able to enforce payment later.

Additionally, the Court may look at loans or gifts made post-separation (but prior to a formal property settlement).  One particular case involved the treatment of a loan made by the husband’s mother to the husband post trial but before judgement was delivered.  Before the loan was made, the asset pool was $650,000. (The parties’ relationship spanned 18 years and they had three children, all under the age of 18.) The loan was approximately $1.3million to purchase a home and $15,000 to renovate.  The loan and purchase were discovered after trial.

The Judge was critical of Husbands conduct determining that the “Husband intentionally awaited the conclusion of the final hearing before proceeding with the purchase of the property.  This was clearly done by the Husband in an attempt to avoid placing before the court evidence concerning the property.  I do not accept it was merely coincidence that the husband purchased the property less than three weeks after the conclusion of the final hearing.”

The Judge found that the husband’s mother would never enforce the loan so added $1.3 million to the asset pool. The wife ended up with 42.5%, or an additional $552,500!

The husband appealed on the basis that the additional $1.3 million was a loan he would be liable repay and not a gift so should not be considered part of the asset pool.  His mother confirmed this.  Unusually, the wife unusually did not contest and the husband won on appeal.

However, not every litigant has the resources to fund an appeal.  In this instance the husband had financial backing from his mother. If he didn't he would have been left with the first decision.

Further, had the wife contested the appeal, it remained open for the Court to make a finding that the loan was not likely to be enforced by the mother due to the open-ended nature of the loan and the husband’s lack of capacity to pay and to treat the money as a gift (thereby increasing the total asset pool).  

This case in particular shows how risky it is for people to borrow money from their parents post-separation and prior to there being a formal property settlement.

So remember ... If it’s a gift it’s up for grabs by your spouse.... if it’s a loan, you will need to be able to prove it’s a loan.

And if you want protect your position when lending money to your children… speak to a good lawyer first!

Areas of Law

Family Law

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