Parent's Loans to their Children – what happens after a divorce?

Publications > Parent's Loans to their Children – what happens after a divorce?

 

January 2012

This article examines what happens in a marriage breakdown to money that parents have “loaned” to their children. It will depend on a number of factors as to whether the money will form part of the marital asset pool, or will be considered a liability owing to the parents..

 

It is the most natural thing for parents to want to support their children financially.  Whether they support their children in buying property, transferring their interest in property, or buying a business, parents always make an effort to ensure their child’s happiness.  Money is given or lent to children.  This is an important distinction, discussed in detail below.

 

Parents can find themselves without recourse to retrieve money lent to their child and former daughter or son in law when their child’s marriage ends in divorce.  This will largely depend on the level of formality with which the money is lent to the child.

 

What is considered a gift?
A gift is straight forward in that there is no expectation that the money shall be repaid.  Where it is deemed a gift, the money will be treated as a contribution by the spouse whose parents lent the money.  It will be assessed as part of the matrimonial pool and divisible between the husband and wife.  This means, the parents surrender their money and forfeit any equitable interests they might have held in property obtained using their money.

 

What is considered a loan?
A loan is a transaction that occurs “at arm’s length”.  That is, the parties have agreed orally or in writing to the terms of the loan in a “commercial” manner.  A formal loan agreement would include the term of the loan, the interest payable and the minimum repayments.  The child will have been expected to make repayments to the loan and such an expectation will have been enforced by the parents.  Without evidence of repayments or enforcement of the loan by either party, the loan is likely to be taken to have been forgiven, even where a formal loan agreement has been executed.

 

CASE EXAMPLE
A husband and wife divorced after 13 years of marriage.  The couple married in 1996 and separated in 2006.  Before and during the marriage, the husband’s father had given his son ‘loans’ totalling $587,000.  Due to the dissolution of the marriage, the father now claimed his money back with interest calculated to be $1.5M as well as equitable interests in properties purchased with his money.

 

Should the father have succeeded in his claim, there would have been little left in the matrimonial pool to be divided between the husband and wife. 

 

The father’s case was that he had made a number of loans to his son over the years, both orally and written.  These loans were then formally outlined in a “Deed of Agreement” in 2007, one year after the couple had separated.  This deed included terms of repayment of the loans as well as, “all water rates, council rates and land tax paid by our client [the father]”. 

 

Despite the formality with which the Deed of Agreement had been drafted, the court found that the loan had been forgiven.  Not one dollar had been paid towards repayment, or payment of fees by the father, nor had the loan been enforced.  The court deemed that the agreement was only being pressed against the interests of the wife.

 

Result?
Parents should be well informed of what will be deemed to be a loan at “arm’s length”, and therefore recoverable in family law proceedings between their child and former daughter or son in law, or a gift to their children which is not capable of being recoverable in family law proceedings.

 

Next steps?
If you find this situation similar to your circumstances, you should consult a family lawyer for detailed, confidential advice.  Contact Tuskeen Jacobs at t.jacobs@rostroncarlyle.com or 07 3009 8444.

 

Helena Redmond LL.B
Trainee Solicitor, Family Law