With the cost of housing and general living expenses these days sky rocketing, parents of adult children and even grandparents and extended family are understandably often motivated to provide some financial assistance to their children as they begin to take their first steps into the adult world. In the situations where the children themselves are single the decision usually descends into fairly easily resolved factors of capacity versus need. In the scenarios however where the child are themselves in a relationship (be it married or de facto) the dilemma for many parents is what would happen to the money should that relationship breakdown and the young couple decide to separate.
What is the situation if there is no agreement or documentation surrounding the original payment?
Under a special principle of law, any monies (or other assets) advanced by a parent to one of their children (be they an infant or an adult) is assumed to have been paid or passed over as a “gift” and therefore these monies (or other assets) are at least initially not treated as having any special character or protection and are simply treated as having been wholly intermingled with any other cash or assets that the now separating couple may have to divide between them. In the process of that division however, there are a number of practices that Family Court Judges could typically be expected to follow, being:
- Where the relationship breaks down after a relatively short period following the time when the money was advanced (usually 5 years or less) most Family Court Judges respect the fact that the money advanced was not money to which the other spouse had really made any contribution and therefore the Court is usually inclined to quarantine that money out of the divisible asset pool and therefore effectively return it to the hands of the child of the parents who advanced the money.
- In longer relationships (usually 10 – 15 years or more) Courts generally consider it irrelevant that money may have been advanced from one side of the family or not and instead (again at first instance) tend to treat each spouse as equally entitled to the money, as the other, regardless of the fact that it had originally been gifted from only one side of the family.
- Regardless of the length of the relationship, be it short or long, the factors which might impact on one of the spouse’s present and future and financial needs (such as an obligation to care for infant child or some other impediment that stops that spouse from working to earn a living) tend to trump all other factors and can be used to take a claim on the monies previously advanced which might otherwise have sat at 0% all the way up to 100% in extreme circumstances.
In situations where a parent seeking to advance money is doing so on the, understandable, basis that they are happy to see the benefit shared equally between their own child and his or her spouse for so long as the relationship endures, but do not wish to see their generosity effectively high jacked and taken away from their own child by the other spouse in the event of a relationship breakdown, there are some ways in which these goals can be achieved. Each option however, does require some special arrangements and/or documentation to be put in place.
Option #1 – Record the advance as being a “loan”
If the arrangement can be accepted as a loan then, money that is repayable to the parents is deducted from those assets which would have been divisible between the now separating couple and paid off the top back to the parents. In this way, the parents are a creditor in the same way as a bank or a credit card company and are entitled to have their loan repaid before any of the net assets are divided between the separating second generation couple.
Once the monies are repaid, there is usually no impediment on the parents then turning around and readvancing the money to their own child once the full financial and physical separation between their child and there former partner/spouse has been effected and generally (save for extreme circumstances) no comeback or cause for complaint from the ex-partner/spouse although obviously discretion would be the recommendation.
When it comes to loans and specifically in the quest to have the separating spouse and/or a Family Court Judge accept that the arrangement was in truth a loan, there are however a number of important points to bear in mind:
- First, the critical time for the agreement to be reached to say the arrangement is a “loan” is when the money is advanced. Except in very exceptional circumstances, it is not possible for the parents and the adult child to subsequently reach an agreement that alters the nature of what was previously a gift to change it into something else like a loan.
- Second, although a Loan Agreement can be wholly verbal between the parties (that is nothing in writing), in the absence of any formal documentation, the arrangement is obviously open to suspicion/attack that the “loan” arrangement has been dreamt up as a strategy at some stage after separation on design to defeat a Family Law claim.
- Third, where the arrangement has been documented, it is imperative that the documentation be clear to show that the arrangement truly is a loan and not ambiguous or otherwise open to interpretation to say something else.
- Fourth, whilst it is possible for a loan to have no fixed date for repayment (commonly referred to as loans “payable on demand”) there is a principle of law that states that the loan will not be repayable if it has not been called up inside 6 years from when the loan was originally advanced. As an extension to this, where the loan has been left outstanding for many years, there comes with the increasing time, a growing argument to say the loan has long since been forgiven, or was a loan by name only and was never intended to be repaid in the first place.
- Fifth, it is not necessary for the loan to be expressed as having been made out to both of the couple. The loan can be instead expressed to have been made solely to the advancing parents’ adult child, but in this scenario, there is always the enhanced risk that the other spouse might deny the loan ever existed.
To state the obvious, the best solution to many of the potential risks and issues identified above, would be to have the loan documentation drawn up formally (preferably by a Lawyer) and take steps to ensure that the other spouse either co-signs the loan or is at least clearly notified of its existence in a way that cannot be later denied. In regards to the issue of the Loan Agreement running stale after 6 years or beyond, the best answer would be to have a fresh Acknowledgement signed each cycle of 6 years to re-affirm that the loan is a valid loan and that the money is indeed intended to be repaid.
Although a “loan” arrangement can be a simple and effective defence to protect monies intended to be advanced solely for the benefit of one child in a relationship, using the Family Law “Binding Financial Agreement” system is by far the best and most effective defence. Under this arrangement, an Agreement is actually signed up between the adult child of the parents who are advancing the money and his or her spouse, which Agreement is recognised under the provisions of the Australian Family Law Act. In this Agreement (commonly referred to by the Americans as “Pre-Nups”, the existence of the monies being advanced to the adult child (or the couple collectively) is acknowledged by each of them and it is further acknowledged that the monies are not in any circumstances divisible with the other spouse on marital breakdown. With such an Agreement in place, the parents then have the flexibility of either continuing to designate the arrangement formally as a “loan” or if they wish, to declare from the outset that the money was to be a gift, but in either situation, the money is protected and not open to claim from the other spouse. There are however, three conditions/issues or strings which are attached to achieving this protection:
- Condition #1 – Whilst it is possible for the Agreement to relate only to the one advance being made by the parents, it is highly recommended that the Agreement extends to all of the assets which belong to the adult child and his or her spouse. This means the Agreement ideally should extend to cover how all of the assets and liabilities of the couple, including the monetary advance from the parents, should be divided.
- Condition #2 – If the money advanced remains identifiably quarantined into a particular asset (for example paid as a deposit on a house which is being kept in hand or some other similar type of investment) then all good. However, if the money is being intermingled and/or transformed into other types of investments in which the other spouse might have made some contribution (be it in money or monies worth) then the terms of the Agreement that attempted to quarantine the initial gift might fail depending upon how the terms were originally drafted. Best solution here is for the Agreement to have regular updates (like a Doctor’s check-up) with a commitment to having the Agreement redrafted and resigned should there be a change in the asset configuration, or alternatively perhaps, drafting the Agreement to say that out of any division, a dollar amount equivalent to the amount of the original loan is deducted off the top and paid back to the parents.
- Condition #3 – For these Agreements to be binding, they must follow very strict protocols which require the Agreements to be in writing, contain certain specific wording, signed by the parties with their signatures witnessed by a Justice of the Peace, Commissioner for Declarations or a Solicitor and for both parties to have received independent legal advice as to the effect of the Agreement and as to whether or not it is financially advantageous or disadvantageous for them to sign it at the time the Agreement is signed or beforehand.
As can be seen, the question of whether or not to advance money to assist an adult child who just happens to also be in a relationship, can be a thorny one however, the protections which are available by formal documentation of the arrangements as a loan and/or the use of Family Law recognised Binding Financial Agreements, are both very effective initiatives to minimise the risk of any parents’ hard earned money being lost to their child’s ex-partner should there be a relationship breakdown at some stage in the future.
Michael Zande is a Queensland Law Society accredited family law specialist with over 25 years experience in the field. He is the principal at Zande Law Solicitors, Suite 7, Norwinn Centre, 15 Discovery Drive, North Lakes. To contact Michael for advice phone 3385 0999.
The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.