Money handed to a child is presumed to be a gift unless you can prove otherwise. If you want it back, the loan has to be documented properly at the time.
What happened?
This is the tale of a modestly wealthy father who made what he thought was a loan to his daughter and son-in-law at about the time they bought a home.
Unusually, the arrangement was documented. But it was a DIY job and it was a very strange document that didn’t make a lot of sense.
Money changed hands and the home purchase was completed.
Years later the daughter and son-in-law separated. Unable to agree on a financial separation, they ended up in the Family Court. The father intervened in the case claiming repayment of his money under the document created years earlier.
The Court considered the document, couldn’t make any sense of it and found that it created no obligation to repay. The father never got his money back.
Money that passes from a parent to a child is presumed to be a gift, so the parent is the one who has to prove a loan was intended. The son-in-law’s position in this case was straightforward. He said it was a gift. Without a clear document, he was more likely to be right than wrong.
What should a family loan agreement cover?
A proper loan agreement should record:
- who is lending and who is borrowing, including whether the son-in-law or daughter-in-law is a party;
- the amount and whether interest is payable;
- when it has to be repaid or that it is repayable on demand;
- what happens if the borrowers separate;
- what happens if you die before it is repaid; and
- whether the loan is secured against the property.
Security is what turns a piece of paper into a real right. A mortgage or a caveat registered against the title puts the world on notice that you have an interest in the property and it survives a separation in a way that a handshake doesn’t.
What if you die before the loan is repaid?
An unrepaid loan is an asset of your estate and your executor has to try to recover it from your own child. That is a difficult conversation to leave behind, especially when it isn’t documented. It gets harder still where the other children are watching.
Your Will can deal with it directly. It can forgive the loan or it can count the money as part of that child’s share so the others aren’t short-changed. See Estate planning trap no. 3 – disinheriting a family member.
There is also a time limit on recovering a debt. A loan left undocumented and unmentioned for long enough can become unenforceable no matter how clear your intention was.
Frequently asked questions
Is money I give my child a loan or a gift?
A gift, unless you can prove you intended a loan. The presumption runs against the parent, which is why the document matters more than what everyone remembers agreeing.
Does my child’s partner need to sign?
If the money is going towards a property they own together, yes.
Won’t asking for a written agreement cause offence?
Some families find the conversation awkward, but it’s considerably less awkward than the one that happens in the Family Court a decade later and a written agreement protects your child as much as it protects you.
Can I document a loan I made years ago?
You can record an acknowledgment of the debt now and doing so is better than nothing, though it carries less weight than a document made at the time.
Get the loan drawn up properly
If you’re lending money to a child or another family member, have the loan drawn up by a lawyer. Done properly, the agreement is far more likely to be binding and enforceable and to deal with what happens on a separation or a death.
Book an appointment or call the Wills team on (08) 9220 4433.
This article is general information and not legal advice.
