Consider this scenario: Jack and Jill gave their daughter Mary $200,000 to buy her first home. Ten years later, Mary separated from her husband Paul.
Paul expected to leave the marriage with half of this money. Jack and Jill however had helped Mary with the money before she met Paul and, while they all verbally agreed it was a loan, it was not documented.
In the end, the matter went to court. Whilst Mary “won” (in the sense that she was able to persuade the Trial Judge to treat the $200,000 as a loan repayable to her parents), legal fees amounted to almost a third of the loan.
With the high cost of housing in Australia, parents of adult children naturally want to help their children out financially so that they can break into the property market. A recent survey (commissioned by the National Seniors in 2012) of Australians aged 50 and over has revealed that parents give $22 billion a year to their adult children to help them get established, buy property and tide them over tough times.
This is all well and good, but if there is a relationship breakup further down the track, will you see that money walk out the door and away from the family? No one can really predict how relationships will pan out, so when it comes to the transfer of family wealth, it is worth exercising extra caution to ensure not everything is lost in the event things turn sour.
Any money given by a parent to one of their children is often assumed to have been paid or passed over as a “gift”. It is therefore not treated as having any special character or protection, and is 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 some common principles that the Family Court follows:
- 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 accept that this was not money to which the other spouse had made any contribution, and therefore, this money may not be included in the divisible asset pool.
- Regardless of the length of the relationship, the factors which might impact on one of the spouse’s present and future financial needs (such as an obligation to care for infant children 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 found a claim on the gifted money.
In the case where a parent is wanting to gift money on the basis that it is shared and enjoyed equally between their own child and his/her spouse for as long as the relationship endures, but, in the event of a relationship breakdown, do not want their gift to be taken away from their own child by the other spouse, there are some options to consider:
1. Formally record the advance (gift) as a “loan”
A loan agreement should be in place at the time money is advanced to the child. Ideally, this should be formally documented to avoid suspicion that the “loan” arrangement has been manufactured after separation in order to defeat a Family Law claim.
If the arrangement is accepted by the Court as a loan, the 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 treated as a creditor, just like a bank or a credit card company, and are entitled to have their loan repaid before any of the remaining net assets are divided between the separating second generation couple.
Once the money is repaid, there is usually nothing stopping the parents “readvancing” the money to their own child once the full financial and physical separation between their child and their former partner/spouse has been settled.
2. Family Law Binding Financial Agreement
This agreement is signed by the adult child of the parents who are advancing the money and his or her spouse. In this Agreement (also known as a prenuptial agreement), the money being gifted to the adult child (or the couple collectively) is acknowledged by each of them, who also acknowledge that the money is not in any circumstances divisible with the other spouse in the event of marital breakdown. This money then is protected and not open to claim from the other spouse.
If you are thinking about helping your child/ren buy a house, or gifting them money, we strongly recommend you seek advice from an experienced Family Lawyer to ensure your interests are properly protected.
Matters relating to estate protection, gifting assets/money to children in the context of a relationship breakdown are typically complex. If you do have an issue that requires attention, or for more information on this topic, contact our experienced family lawyer, Mark Orchard:
Phone: 07 4639 0358