Gift or Loan?

Our son-in-law has left our daughter and gone off with the money we lent them both! Can we get it back?

Gift or loan?

How will the Family Law Courts treat money that mum and dad gave or lent their son or daughter? Can mum and dad get the money back if their son or daughter's relationship or marriage ends? Or, will the daughter or son-in-law keep half?

It is often the case that mum and dad provide money to their son or daughter to help them to, for example, buy their first house, or to assist them in running their small business (particularly if the small business is in financial distress). Often the son or daughter is married, or in a de facto relationship, and they purchase a house in joint names with their partner, or conduct a small business with the spouse/partner.

If the money was paid on the express condition that it will be repaid, then notwithstanding the absence of any formal documentation, and regardless of the motivation of the payment, a contract of loan exists. The important feature here is the existence of the express condition.

But if there is no documentation it can get down to a 'he said, she said' scenario.

For example, in the case of Berghan v Berghan (2017) 57 Fam LR 104, a 45 year old son whose small business and marriage were in difficulties, asked his father (in his 70s) for money. The son said 'I need the money quickly, I'll repay it all and I'll look after both you and Mum in your old age'. His father agreed on behalf of both himself and his wife, and initially transferred about $100,000 to his son. The son and his wife were sole directors of a company which ran their business. The business was in financial distress and the son, over a period of years, continued to ask his father for money to prop up the failing business and his father continued to supply him with money.

There was never any formal documentation establishing a loan as the parents trusted their son. The son breached the promise he made to his father and never repaid any money.

In total the parents advanced about $286,000. The son's brother then chimed into the situation. The relationship between the son and his wife broke down, the relationship between the two brothers broke down, and the relationship between the elderly parents and the son broke down. The family ended up in Court.

The Court found the payments made by the parents were contracts of loan in respect of which the monies were repayable on demand and repayable by the son personally.

Invariably, at the time of separation there is confusion, claim and counter claim, as to the status of the advancement of funds with some of the parties arguing it is a loan and others arguing it is a gift.

If the intention of all parties is that the money is advanced as a loan, then to put the issue beyond reasonable doubt, a formal loan agreement should be prepared by lawyers and signed by all parties, prior to the transfer of any funds. Further, each party to the agreement should have independent legal advice.

Whilst at first blush, at a time when all parties are getting on well, this may seem like overkill, the cost of having a formal loan agreement properly prepared and the parties obtaining independent legal advice will pale into insignificance by comparison to the cost, angst and family breakdown involved in bitter protracted litigation.

Consider for a moment how the Berghan parents must have felt with their two sons fighting, their son and daughter-in-law separated, and their son defending their claim for repayment in Court. All of this could have been avoided with expert legal and accounting advice.

The parties should not only have a formal loan agreement prepared, but should follow the terms of the agreement. The reason for this is, even if a contract of loan is established, it does not necessarily follow that any liability so created will be taken into account in determining how the son/daughter's assets should be divided in the Family Law Courts. The Family Law Courts may decide to ignore the terms of the unsecured alleged liability in certain circumstances, where for example the terms of the loan agreement (whether written or unwritten) are vague, uncertain or unlikely to be enforced.

For example, in the case of Biltoft & Biltoft [1995] Fam, CA 45 the Court considered a liability to an unsecured creditor.

In that case the Court confirmed that the normal procedure in the Family Law Courts for determining the value of the assets of the parties, is to value the assets and take off the value of the total liabilities.

However, the procedure in relation to unsecured liabilities is not absolute, nor is it prescribed by statute. A number of well recognised exceptions exist where the Family Law Court may determine not to take into account the value of the unsecured liability, or may discount the liability. For example, where the liability is vague or uncertain, if it is unlikely to be enforced or if it was unreasonably incurred.

There is no requirement that the rights of an unsecured creditor or a claim by a third party must be considered and dealt with prior to the Family Law Courts making an order for property settlement as between the husband and wife. Nor is there a rule of priority as between a creditor claimant and a spouse.

The rights of a creditor may not be ignored, rather they must be balanced against the rights of the spouse.

"If the intention of all parties is that money is advanced as a loan, then to put the issue beyond reasonable doubt a formal loan agreement should be prepared by lawyers, and signed by all parties prior to the transfer of any funds. Each party to the agreement should have independent legal advice."

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Jane Ekin-Smyth

Jane Ekin-Smyth

Consultant
Stephen White

Stephen White

Partner