Gift or loan – and why it matters

So, you have decided to separate. There will be many things you need to consider as you part ways, particularly if you have children, but one important consideration involves the identification of the asset pool and deciding how it will be split.

At a time when emotions are already high, discussions around assets can raise the temperature so it is a good idea to ensure that, wherever possible, if there are family loans they have been documented correctly.

The asset pool

When dividing your assets after separation, part of your negotiation will require parties to identify:

(a) The extent and value of the assets, liabilities and financial resources to be adjusted; and

(b) The source of those assets, liabilities and financial resources.

A dispute can arise in relation to the source of funds for certain assets or liabilities using money provided by family members.

A loan from the bank of Mum and Dad, like all loans, will reduce equity in the assets to be divided as it can reasonably be expected that loans will be repaid, or refinanced by one party, to finalise the joint financial relationship of the separating parties.

Why is documenting family loans important?

If money has been gifted by family members, an adjustment can be made in favour of a party for the contribution made to the asset pool. Generally speaking, unless an alternative intention is established, the adjustment will be made in favour of the party with the family connection to the donor.

A loan should have the characteristics of a borrowing arrangement you would expect to have with a commercial lender such as a loan agreement, evidence of repayments, details of interest to be paid and certainty around the value and period of the loan.

When a dispute arises about the character of money provided by family members, independent documentary evidence is key. A loan can be quickly identified if documents are available to confirm details of the borrower/s, the lender/s and the terms and conditions of the loan at the time the money is provided.

Was it a “Gift” and was it gifted to you both?

Financial contributions in the form of a gift can be assessed at three stages of a relationship:

(a) at the commencement of the relationship;

(b) during the relationship; and

(c) post separation.

Contributions are easier to identify if records can show the value of the money gifted and how it was applied to purchase certain assets.

A gift could come in the form of a deposit to buy a home or a car or it could even be living with the extended family rent free.

As an example, if the parents of one partner provided a monetary gift towards the purchase of a car or house that both parties use, this extra contribution may see a greater adjustment being made towards their son/daughter.

However, the matter becomes more complex if the gift was provided to both parties a court may not view this as a contribution from only one party.

Making it clear

Over time memories fade and recollections of what was originally agreed may differ. Arguments in relation to contributions can be minimised by having relevant documents available to support your position. If you would like further advice in relation to your family law property settlement, contact Catton & Tondelstrand Lawyers for a free initial consultation.

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