Navigating Gifts and Loans from Family in Relationship Breakdown

The housing market's increasing challenges have led many young couples to rely on financial assistance from parents and relatives to purchase their homes.

Research by the University of Sydney found that in Australia two in five young adults expect they will receive family help to buy their first home purchase.

While this can be a great help, it can also become a source of conflict in the event of a relationship breakdown which we know is not an uncommon outcome.

Disagreements then arise about whether the funds were a gift or a loan. The distinction between the two is crucial because it can significantly impact the division of matrimonial assets and can unfairly prejudice lenders if the court gets it wrong.

What we see in practice on a regular basis is that parents advancing funds to facilitate the purchase of a property have not documented their loans to adult children, have not secured the loan and sometimes have not considered the issues at all. Often, each party has made their own unspoken assumptions. It is only years down the track, when a property is sold, financial difficulty strikes, or divorce occurs, that people turn their minds to the problem of repayment.

Understanding the Legal Implications

An agreement doesn't always need to be in writing to be legally binding. However, under contract law, for an agreement to be legally binding, both parties must have had the intention to create legal relations at the time of making the agreement. In family, social, or domestic contexts, this intention is often missing. Therefore, it's of critical importance that any agreements regarding loans be documented in a formal written contract so that the intention can be clearly stated. For the best possible chance of the Court characterising the advance as a loan, the document should clearly state the lenders' legal rights to call on the advanced funds, the conditions of repayment, the interest due, and whether the loan can be secured with collateral. It is highly advisable for both the lender and the lendee to seek independent legal advice, especially if the loan is secured against real property.

Even when loans are properly documented, family courts may choose not to treat the money advanced between family members as a liability in the joint asset pool. In such cases, the court considers the pressing nature of the obligation. If the obligation is unlikely to be met, it may not be factored into the property division.

The Role of Financial Agreements

One way to protect your assets is by entering into a Financial Agreement (BFAs), which coloquially are known as ‘pre-nups’. These agreements can be made at any point during a relationship and can help to ensure that gifts and assets acquired through those gifts remain the separate property of the recipient in case of separation. However, BFAs are complex legal documents with stringent legislative requirements. They require careful drafting to align with the parties' intentions and consideration of the range of different outcomes given the vicissitudes of life.

Lack of a Legally Binding Loan Agreement

In cases where there is no legally binding loan agreement, the court considers various factors to determine if the funds advanced should be categorized as a repayable loan rather than a gift. These factors include correspondence dictating the terms of the agreement, the clarity of repayment terms, actual repayments, discussions held between the parties, how the funds were used, and the presence of any security, such as a registered mortgage.

The Risk of Statute of Limitations

Even when there is an expectation of repayment, the law may prevent lenders from enforcing the debt if the limitation period has passed. Under the Victorian Limitations of Actions Act 1958 and similar legislation in other states, there is a 6-year period for debt recovery. If a debt cannot be enforced it is less likely to be considered as a liability in the joint pool. To avoid losing funds in a family law property settlement, a repayment date should be included in the written agreement, or the agreement can state that the repayment obligation is triggered by an event, such as the relationship ending.

Gifts and Inheritances

Receiving money as a gift or inheritance does not result in that money being retained by the receiver dollar for dollar in a separation or divorce. The recipient may be entitled to an adjustment of the joint property pool due to greater financial contributions, but this varies based on the specific circumstances, including the timing of the gift, how the funds were used, the length of the relationship, and other factors considered in property settlements under the Family Law Act.

Seeking Tailored Legal Advice

No two cases are the same, and outcomes in family court cases can vary widely. If you have lent or received money in a relationship or expect funds from a family member, seek legal advice early to protect these funds and reduce the potential for future conflicts.

At Focus on Family, our legal team can provide advice to help you negotiate a fair property settlement, or if necessary, advocate for your best possible outcome in court if you are going through a separation or divorce. Our goal is to ensure that your rights and assets are protected during this challenging time.