In our last article, we talked about how parties can better protect their assets prior to entering a de facto relationship or marriage through the use of a Binding Financial Agreement or “Pre-nuptial Agreement”.
In this week’s article, we will be telling you how to further protect your interests if you are a parent and loaned some money to your children or are thinking of loaning money to your children.
As we all know – parents love their children and want to give them all that they can – including loaning money to their children to assist them financially. Parents frequently provide loans to their children without thinking too much about it nor considering the various risks involved when doing so.
These loans to their children are usually unsecured, informal, verbal, unrecorded, and purely rely on the trust and relationship between the child and the parent in line with the common thinking that – “blood is thicker than water”. However, what is not always considered is the risk of lending money to a child who may later be subject to a Family Law property settlement when the parties unfortunately get a divorce or separate from one another.
Reasons Parents loan money to their Children
The most common reasons why money is loaned by parents to children are to assist with:
The purchase of a first house through a deposit or even purchasing the entire house outright;
- The purchase of a motor vehicle;
- The payment of university/further studies fees;
- The purchase of a business or an injection of cash flow into an existing business;
- The payment of legal fees;
- The payment of medical fees; or
- Any other short term emergency loans.
What happens to the Loan when your Children split up with their partners or decide to end their marriage?
When parties apply to the Family Court for property orders after separation, the Family Court will take into consideration all of the assets (property) and liabilities (debt) of the de facto relationship or marriage before deciding on how the total net asset pool should be divided between the parties.
The Family Court usually draws the following conclusions in regards to the funds loaned by parents to children, whereby the loan is either:
- A genuine loan (The Family Court is likely to decide that the loan is really a loan when the loan is on similar terms to a proper bank loan or a third party loan); or
- A masked or concealed gift, where the Family Court deems that the parents have no genuine intent to pursue reimbursement of the loan from the child.
Many people are very shocked when they discover that where the debts include an unsecured debt owed to family members, the Family Court might completely disregard that debt. On the other hand, the Family Court might consider that the loan is a financial resource of the child and make an adjustment in favour of the estranged spouse or de facto partner. This means that your hard earned money that was intended to help out your child could end up in the hands of the child’s estranged spouse or de facto partner!
So, what should you do to protect the Loan?
We advise that all loans must be documented in writing and have such documents properly drafted by experienced lawyers to avoid any uncertainty about the intentions of the parties involved. In addition to that, you can further secure the loan by a registered Mortgage over the child’s property to further protect your interests.
If you are thinking of lending money to a child or if you have already loaned the money to the child and wish to secure the loan, then please contact one of our experienced lawyers as soon as possible so that we can assist you to better protect your interests.