Family members commonly help out their adult children or grandchildren through the provision of financial assistance, and this is likely to continue during fraught economic times.
It is not uncommon for disputes to arise between parties as to whether an advance made by a family member is a gift or a loan. This can have significant consequences as, if the Court determines it is a gift, the funds form part of the asset pool to be divided between the parties and the ability of one party to secure repayment is limited.
The Family Court considers the evidence as it relates to 2 issues:
- Whether the transaction was a loan (including a loan without formal documentation) or a gift;
- If the contract of loan is established, whether justice and equity dictates that it should not be taken into account.
The Court may find it is proper to disregard a liability which
is "vague or uncertain, unlikely to be enforced,
or unreasonably incurred" (In the Marriage Of:
Christopher John Biltoft Cross-Appellant/Husband and Valentina
Biltoft Respondent/Wife Appeal  FamCA 45; (1995) FLC 92-614
(10 May 1995))
In effect, the Court asks, "but for the marital breakdown, would the loan likely have been called on and/or enforced or is it really a disguised gift?"
Process for Determining Property Settlement
- What is the value of the asset pool?
- Assess parties contributions
- Assess any adjustment factors as may be applicable
- Consider if the outcome is just and equitable
- Make the intention clear. If it is agreed that the debt needs
to be repaid, this needs to be clearly communicated to the party
and their partner/spouse. This should also be done by documenting
the arrangement and keeping a paper trail.
- The onus of proof is on the person asserting the existence of the loan and it is not uncommon for the other party to suddenly develop 'selective memory' as to discussions at the time the advance is made.
- It is preferable for a formal loan agreement to be drawn up which has clear and concise terms and is capable of enforcement. The loan agreement should include the date and purpose of advance, whether interest is chargeable, when the loan is repayable, and whether security is granted. It is preferable if the other party (partner/spouse) also signs the agreement or acknowledges its existence.
- Keep records of any written discussions. If there are verbal discussions, ensure written records are sent afterwards that confirm those discussions e.g. emails. Keep records of the actual advances made and, if interest is charged, records of the charges.
- Consider taking security, charging interest, and other
- The Court is more willing to take into account loans made on commercial terms where repayment is realistic. Treat any loan as if from a bank e.g. interest charged, mortgage or charge registered against real estate, repayments made.
- Be consistent with your intentions.
- Does a Will need to be updated to reflect the existence of the loan and your intention towards it? Do financial records need to be updated? Does the party need to declare the loan in any applications for a mortgage?
- Do not wait until the breakdown of a relationship to take steps to document the loan, obtain security, or enforce its terms. The Court will view this with a healthy degree of skepticism.
- Be mindful of the Statute of Limitations. If the debt cannot be legally enforced, it is very unlikely to form part of the asset pool.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.