During this COVID-19 pandemic, we have seen thousands of people being stood down or losing their jobs and lining up in queues at Centrelink. Pay cuts are not uncommon. Many small businesses have suffered major reductions in business revenue and are on the brink of permanent closure.
It is not uncommon for people to look to their parents for financial support, for example, to help pay the mortgage or other debts or to help keep a child’s business afloat.
Often, it is not clear whether the advance from parents to the child was a gift or a loan because it was never made clear or discussed in any detail at the time when the advance was made. This often becomes a problem in:
- estate disputes (for example, if the parents are deceased and it is unclear whether their executors may recover the advance from the child for the benefit of the deceased parents’ estates);
- matrimonial property disputes (for example, should the child separate or divorce his or her partner, whether a further dispute may arise as to whether the monetary advance from the parents should be added to the matrimonial asset pool as a joint liability repayable to the parents or alternatively classified as a gift which is not recoverable by the parents): see for example Chaudhary v Chaudhary [2017] NSWCA 222; and
- bankruptcy matters (for example, if a child becomes bankrupt, the parents who had advanced the child money could find their claim as creditors being rejected by the bankruptcy trustee due to lack of evidence).
What does the law say about parent-to-child loans?
Whether the monetary advance provided by parents to a child was a loan or a gift is a tricky question and can only be decided on a case-by-case basis.
The starting point is there is a rebuttable legal presumption (the presumption of advancement or gift) that when parents advance money or other property to a child, the court will presume that it was a gift unless there is evidence which suggests otherwise. The court may consider the following factors (the list is not exhaustive) when determining whether the monetary advance was a gift or a loan:
- Was there any written loan agreement between the child and parents?
- What were the terms and conditions of the loan?
- What was the purpose of the loan?
- Did the parents intend the child to repay the money, and if so, what were the terms of the repayment?
- Was there any guarantee or security, such as a registered mortgage over the child’s property?
- Were there any other records such as text messages and email correspondence between the parents and child discussing the existence and terms of the loan?
- Had the child repaid any money to the parents?
- If it was a loan, what happens if the child predeceases the parents? What happens if the parents die before the child? Would the loan be forgiven by the parents? (and if so, when and how the loan would be forgiven? whether it was stipulated in the parents’ Will?)
Tips for parents to protect themselves
If a parent intends to advance money or other property to a child with the intention of it being a loan, what should that parent do to protect their interests?
Written evidence of a loan agreement is vital. The loan agreement does not need to be lengthy. At the very least, it needs to:
- evidence that both the parent and child agreed it was a loan,
- confirm the amount of the loan, and
- state any other agreed terms such as when it is payable.
If possible, it is also recommended that the parent register a mortgage over the child’s property (if any) to provide additional security for the parent. This provides protection for the parents in the event of, for example, the child getting into a dispute with his or her spouse over matrimonial property split or goes bankrupt
We also recommend the parent keep all records, including bank statements, receipts, text messages and email correspondence evidencing the existence of the loan as well as the discussion between the parent and child.
The parent may also wish to inform his or her accountant and estate planning solicitor of the loan so that they can provide relevant accounting, taxation and estate planning advice to that parent. The parent should also update his or her estate planning documents to ensure that they reflect the parent’s intentions regarding the loan.
What should a parent do if he/she intends to gift a sizeable sum of money or property to a child instead?
To ensure there is no (for example) estate dispute as to whether it was a gift or a loan, the parent should document the transaction as a gift. For instance, if it was by way of bank transfer, the parent should record the transfer as ‘gift.
The parent and child should also sign a Deed of Gift which states, among other things, the parent voluntarily and without monetary consideration or ‘in consideration of love and affection’ gifts the money or property to the child. The parent should also consult his or her estate planning lawyer and accountant to inform them of this arrangement.
We recommend the parent seeks legal advice promptly to ensure his or her interests are protected. It will probably be too late to try and formalise a loan agreement if, for example, there is already a family law matrimonial property dispute. Failure to act promptly may result in the parent losing his or her rights over the money advanced to the child.
Bennett & Philp Lawyers are legal experts who are experienced in parent to child loan agreements and in the event of a dispute, we can guide you through the litigation process and ensure the matter is resolved in time and cost-effective manner. Click here to find out how we can help.
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